Form 10-12B/A M-tron Industries, Inc.

 

As filed with the Securities and Exchange Commission on August 19, 2022

 

File No. 001-41391

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 4

to

FORM 10

 

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

PURSUANT TO SECTION 12(b) OR (g) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

M-tron Industries, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

 

(407) 298-2000

(Registrant’s telephone number, including area code)

 

Copies to:

 

Michael L. Zuppone

Paul Hastings LLP

200 Park Avenue

New York, New York 10166

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

 

Securities to be registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☑

 

 

---

 

 

M-tron Industries, Inc. (“Mtron”)

INFORMATION REQUIRED IN REGISTRATION STATEMENT

CROSS REFERENCE SHEET BETWEEN INFORMATION

STATEMENT AND ITEMS OF FORM 10

Certain information required to be included herein is incorporated by reference to specifically identified portions of the body of the information statement filed herewith as Exhibit 99.1 (the “information statement”). None of the information contained in the information statement shall be incorporated by reference herein or deemed to be a part hereof unless such information is specifically incorporated by reference.

The information required by this item is contained in the sections “Summary,” “Risk Factors,” “Cautionary Statement Regarding Forward-Looking Statements,” “The Spin-Off,” “Capitalization,” “Unaudited Pro Forma Financial Statements,” “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related Party Transactions,” “Management,” “Executive Compensation,” “Where You Can Find More Information” and “Index to Combined Carve-Out Financial Statements” (and the statements referenced therein) of the information statement. Those sections are incorporated herein by reference.

The information required by this item is contained in the sections “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” of the information statement. Those sections are incorporated herein by reference.

The information required by this item is contained in the sections “Summary,” “Risk Factors,” “Capitalization,” “Unaudited Pro Forma Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Index to Combined Carve-Out Financial Statements” (and the statements referenced therein) of the information statement. Those sections are incorporated herein by reference.

The information required by this item is contained in the section “Business -- Properties” of the information statement. That section is incorporated herein by reference.

The information required by this item is contained in the section “Security Ownership of Certain Beneficial Owners and Management” of the information statement. That section is incorporated herein by reference.

The information required by this item is contained in the section “Management” of the information statement. That section is incorporated herein by reference.

The information required by this item is contained in the sections “Executive Compensation” and “Management” of the information statement. Those sections are incorporated herein by reference.

The information required by this item is contained in the sections “The Spin-Off,” “Certain Relationships and Related Party Transactions” and “Management” of the information statement. Those sections are incorporated herein by reference.

The information required by this item is contained in the section “Business–Legal Proceedings” of the information statement. That section is incorporated herein by reference.

 

---

 

The information required by this item is contained in the sections “Summary,” “Risk Factors,” “The Spin-Off,” “Dividend Policy” and “Description of Capital Stock” of the information statement. Those sections are incorporated herein by reference.

The information required by this item is contained in the section “Description of Capital Stock–Sale of Unregistered Securities” of the information statement. That section is incorporated herein by reference.

The information required by this item is contained in the section “Description of Capital Stock” of the information statement. That section is incorporated herein by reference.

The information required by this item is contained in the sections “The Spin-Off–Relationship Between Mtron and the Company” and “Description of Capital Stock–Limitation on Liability and Indemnification of Directors and Officers” of the information statement. That section is incorporated herein by reference.

The information required by this item is contained in the sections “Selected Historical Financial Information” and “Index to Combined Carve-Out Financial Statements” (and the statements referenced therein) of the information statement. Those sections are incorporated herein by reference.

None.

 

---

 

The information required by this item is contained in the sections “Index to Combined Carve-Out Financial Statements” (and the statements referenced therein) of the information statement. That section is incorporated herein by reference.

The following documents are filed as exhibits hereto:

 

* Filed herewith

+ Indicates management or compensatory plan.

 

---

 

SIGNATURE

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Date: August 19, 2022

 

 

 

AMENDED & RESTATED SEPARATION AND DISTRIBUTION AGREEMENT

THIS AMENDED & RESTATED SEPARATION AND DISTRIBUTION AGREEMENT (this “Agreement”) is dated as of August 19, 2022 between The LGL Group, Inc., a Delaware corporation (“LGL”), and M‑tron Industries, Inc., a Delaware corporation and, as of the date of this Agreement, a wholly owned subsidiary of LGL (“Mtron”).  As used herein, LGL on the one hand, and Mtron, on the other hand, are sometimes referred to individually as a “Party”, or together, as “Parties”.

RECITALS

WHEREAS, the Parties entered into that certain Separation and Distribution Agreement, dated as of August 3, 2022 (the “Existing Distribution and Separation Agreement”);

WHEREAS, LGL is the sole member of M-tron Systems Holdings, LLC, a Delaware limited liability company (“Mtron Holdings”), and Mtron Holdings is the sole stockholder of Mtron;

WHEREAS, the board of directors of LGL (the “LGL Board”) has determined that it is appropriate and advisable to separate Mtron and its subsidiaries from LGL into a separate publicly traded company (the “Separation”);

WHEREAS, in connection with the Separation, the LGL Board had determined that it was appropriate and advisable for the Mtron common stock, par value $0.01 per share (“Mtron Common Stock”), that LGL owns to be distributed to holders of LGL common stock, par value $0.01 per share (“LGL Common Stock”) (the “Distribution”);

WHEREAS, in its capacity as sole member of Mtron Holdings, LGL has authorized the transfer of Mtron Common Stock to be effected through the Distribution;

WHEREAS, LGL and Mtron intend that, for U.S. federal income tax purposes, the Distribution and the other transactions contemplated by this Agreement shall be generally tax-free under Section 355 of the Code (as defined below); and

WHEREAS, each of LGL and Mtron have determined that it is advisable to set forth the principal transactions required to facilitate and effect the Separation and the Distribution and to provide for other agreements that will govern certain matters regarding the Separation and the Distribution;

WHEREAS, the Parties have determined it is advisable to reschedule the distribution of Mtron Common Stock that will effect the Separation and adjust the distribution ratio to provide for the distribution of one-half of a share of Mtron Common Stock for each share of LGL Common Stock held by a LGL stockholder; and

WHEREAS, the Parties desire to amend and restate the Existing Separation and Distribution Agreement in its entirety and enter into this Amended and Restated Separation and Distribution Agreement.

 

---

 

NOW, THEREFORE, in consideration of the premises and the mutual promises contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by LGL and Mtron, LGL and Mtron agree as follows:

ARTICLE I
Definitions; General Interpretative Principles

1.1Definitions.  As used in this Agreement, the following terms shall have the following respective meanings:

“Administrative Agreement” shall mean the Transitional Administrative and Management Services Agreement, dated of even date herewith, between LGL and Mtron.

“Affiliate” of any Person shall mean another Person that directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, such first Person; provided, however, that for the purposes of this Agreement from and after the Distribution, no member of the LGL Group shall be deemed to be an Affiliate of any member of the Mtron Group, and no member of the Mtron Group shall be deemed to be an Affiliate of any member of the LGL Group.

“Ancillary Agreements” shall mean those agreements listed on Schedule 1.1(a).

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Consents” shall mean any consents, waivers or approvals from, or notification requirements to, any third parties, including governmental approvals.

“Distribution” shall have the meaning set forth in the Recitals.

“Distribution Agent” shall have the meaning set forth in Section 3.1.

“Distribution Date” shall mean the date on which the Distribution occurs.

“Distribution Taxes” shall mean any tax, fee, assessment, charge or levy made by a Governmental Authority in connection with, arising from or attributable to the Distribution and the transactions necessary to effect the Distribution.

“Distribution Time” shall mean 11:59 p.m., Eastern Time, on the Distribution Date or such other time designated by the LGL Board as the time at which the Distribution is to be effective on the Distribution Date.

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

“Form 10” shall mean the registration statement on Form 10 of Mtron with respect to the registration under the Exchange Act of the Mtron Common Stock, including any amendments or supplements thereto.

2

---

 

“Governmental Authority” shall mean any federal, state or local court, government, department, commission, board, bureau, agency, official or other regulatory or administrative authority.

“Group” shall mean the Mtron Group or the LGL Group, as applicable.

“Indemnifiable Loss” has the meaning set forth in Section 6.3.

“Indemnifying Party” has the meaning set forth in Section 6.5.

“Indemnitee” has the meaning set forth in Section 6.5.

“Information” of a Party shall mean any and all information that such Party or any of its Representatives, whether furnished orally or in writing or by any other means or gathered by inspection and regardless of whether the same is specifically marked or designated as “confidential” or “proprietary,” together with any and all notes, memoranda, analyses, compilations, studies or other documents (whether in hard copy or electronic media) prepared by the receiving Party or any of its Representatives which contain or otherwise reflect such information, together with any and all copies, extracts or other reproductions of any of the same; provided, however, that for the purposes hereof, all information relating to the LGL Group and its businesses, assets and liabilities in the possession of any member of the Mtron Group at the time of the Distribution shall be deemed to have been furnished by the LGL Group and all information relating to the Mtron Group and its businesses, assets and liabilities in the possession of any member of the LGL Group at the time of the Distribution shall be deemed to have been furnished by the Mtron Group; and further provided that the term “Information” does not include information that:

“Information Statement” shall mean the information statement and any related documentation to be distributed to holders of LGL Common Stock in connection with the Distribution, including any amendments or supplements thereto.

“LGL Board” has the meaning set forth in the Recitals.

“LGL Common Stock” has the meaning set forth in the Recitals.

“LGL Group” shall mean LGL and its Subsidiaries, other than the Mtron Group.

3

---

 

“LGL Indemnifiable Loss” has the meaning set forth in Section 6.3.

“Liabilities” shall mean any and all debts, liabilities, commitments and obligations, whether fixed, contingent or absolute, matured or unmatured, liquidated or unliquidated, accrued or not accrued, known or unknown, whenever or however arising and whether or not the same would be required by generally accepted accounting principles to be reflected in financial statements or disclosed in the notes thereto.

“Mtron” has the meaning set forth in the Preamble.

“Mtron Common Stock” has the meaning set forth in the Recitals.

“Mtron Group” shall mean Mtron and each of the entities set forth on Schedule 1.1(b), and any other entities that may become Subsidiaries of Mtron.

“Mtron Indemnifiable Loss” has the meaning set forth in Section 6.2.

“Party” has the meaning set forth in the Preamble.

“Person” shall mean any natural person, corporation, general or limited partnership, limited liability company, joint venture, trust, association or entity of any kind.

“Record Date” shall mean the record date for the Distribution determined by the LGL Board for the Distribution.

“Record Holders” has the meaning set forth in Section 3.1.

“Representatives” of a Party shall mean such Party’s officers, directors, employees, accountants, counsel, investment bankers, financial advisors, consultants and other representatives.

“SEC” shall mean the U.S. Securities and Exchange Commission.

“Securities Act” shall mean the Securities Act of 1933, as amended.

“Subsidiary” shall mean, with respect to any Person, any corporation or other organization, whether incorporated or unincorporated, of which (i) such Person or any other Subsidiary of such Person is a general partner or (ii) at least 50% of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization or at least 50% of the value of the outstanding equity is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries.

“Tax Indemnity and Sharing Agreement” shall mean the Tax Indemnity and Sharing Agreement, dated of even date herewith, by and between LGL and Mtron.  

“Third-Party Claim” has the meaning set forth in Section 6.6(a).

4

---

 

1.2General Interpretive Principles. (a) Words in the singular will include the plural and vice versa, and words of one gender will include the other gender, in each case, as the context requires, (b) the word “including” and words of similar import when used in this Agreement will mean “including, without limitation,” unless otherwise specified, (c) any reference to any federal, state, local or foreign statute, law or code will be deemed to also refer to all rules and regulations promulgated thereunder, unless the context otherwise requires and (d) any reference to any agreement will be deemed to mean the agreement as it may be amended from time to time.

ARTICLE II

Recapitalization

2.1Recapitalization of Mtron.  Subject to the satisfaction or waiver of the conditions set forth in Section 3.3, LGL and Mtron will cause as recapitalization of Mtron by means of stock split or stock dividend such that after the Record Date and before the Distribution Time the number of shares of Mtron Common Stock issued and outstanding immediately before the Distribution Time will equal one-half the number of shares of LGL Common Stock issued and outstanding as of the Record Date, which Mtron Common Stock owned by LGL will constitute all of the issued and outstanding capital stock of Mtron.

2.2Further Assurances.

(a)In addition to the actions specifically provided for elsewhere in this Agreement, each Party will use its commercially reasonable efforts at and after the Distribution Time to take, or cause to be taken, all reasonable actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws and agreements to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Agreements.

(b)Each Party will cooperate with the other Party, and without any further consideration, to execute and deliver, or use its commercially reasonable efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all Consents, approvals or authorizations of, any Governmental Authority or any other Person under any permit, license, agreement, indenture or other instrument (including any Consents), and to take all other actions as the Party may reasonably be requested to take by the other Party from time to time, consistent with the terms of this Agreement and the Ancillary Agreements, in order to effectuate the provisions and purposes of this Agreement and the Ancillary Agreements.  Notwithstanding the foregoing or anything else in this Agreement or any Ancillary Agreement to the contrary, no member of either Group will be required to make any payment, incur or become subject to any Liability, agree to any restriction, surrender any right or asset or otherwise enter into any agreement, or be required to permit to occur any event, that would be material, in relation to the Consent sought, in order to obtain any such Consent.

2.3No Representations or Warranties.  Except as expressly set forth in this Agreement or in any Ancillary Agreement:

5

---

 

(a)no member of the LGL Group or the Mtron Group is making any representation or warranty of any kind whatsoever, express or implied, to any Party or any member of the LGL Group or the Mtron Group in any way with respect to any of the transactions contemplated by this Agreement or the business, assets, condition or prospects (financial or otherwise) of, or any other matter involving, any Party; and

(b)none of LGL, Mtron or any member of the LGL Group or the Mtron Group, as applicable, or any other Person makes any representation or warranty with respect to the Separation, the Distribution or the entering into of this Agreement or the transactions contemplated by this Agreement.

ARTICLE III
Plan of Reorganization Transactions

3.1Delivery to Distribution Agent.  LGL will deliver to Computershare Trust Company, N.A. , as distribution agent (the “Distribution Agent”), for the benefit of holders of record of LGL Common Stock at the close of business on the Record Date (the “Record Holders”) a stock certificate representing (or authorize the related book-entry transfer of) all outstanding shares of Mtron Common Stock and will order the Distribution Agent to effect the Distribution in the manner set forth in Section 3.2.

3.2Mechanics of the Distribution.

(a)LGL will direct the Distribution Agent to, as promptly as practicable following the Distribution Time, distribute to each Record Holder a number of one-half of a share of Mtron Common Stock for each share of LGL Common Stock held by such Record Holder on the Record Date. All of the shares of Mtron Common Stock so issued will be fully paid and non-assessable.  The Distribution will be effective as of the Distribution Time.

(b)LGL will direct the Distribution Agent to determine, as soon as is practicable after the Distribution Date, the number of fractional shares, if any, of Mtron Common Stock allocable to each Record Holder entitled to receive Mtron Common Stock in the Distribution and to promptly aggregate all the fractional shares and sell the whole shares obtained thereby, in open market transactions or otherwise, at the then-prevailing trading prices, and to cause to be distributed to each Record Holder, in lieu of any fractional share, each Record Holder’s ratable share of the proceeds of the sale, after making appropriate deductions of the amounts required to be withheld for federal income tax purposes and after deducting an amount equal to all brokerage charges, commissions and transfer taxes attributed to the sale.

3.3Conditions Precedent to the Distribution.  Neither the Distribution nor the related transactions set forth in this Agreement or in any of the Ancillary Agreements will become effective unless the following conditions have been satisfied, at or before the Distribution Time:

(a)the stockholders of LGL shall have approved at a special meeting of stockholders the transfer of substantially all assets of LGL by means of the Separation and the Distribution in accordance with the General Corporation Law of the State of Delaware;

6

---

 

(b)the Form 10 shall be effective under the Exchange Act, with no stop order in effect with respect thereto;

(c)the Information Statement has been mailed to LGL’s stockholders;

(d)the actions and filings, if any, necessary under securities and blue sky laws of the states of the United States and any comparable laws under any foreign jurisdictions have been taken and become effective;

(e)the approval for listing of the Mtron Common Stock on the New York Stock Exchange American, subject to official notice of issuance, has been obtained;

(f)no order, injunction, decree or regulation issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Distribution will be in effect and no other event outside LGL’s control will have occurred or failed to occur that prevents the consummation of the Distribution; and

(g)no event or development has occurred or exists that in the good faith judgment of the LGL Board, in its sole discretion, makes the Distribution inadvisable.

ARTICLE IV
Payment of Liabilities

4.1Payment of Liabilities.  Subject to ARTICLE VI of this Agreement, from and after the Distribution Time, (i) Mtron shall indemnify LGL and its respective Representatives with respect to any claims relating to Mtron and its business, assets and liabilities and (ii) LGL shall indemnify Mtron and its Representatives with respect to any claims relating to LGL and its business, assets and liabilities.

ARTICLE V
Other Agreements

5.1Use of Names.  Mtron shall have all rights in and use of the trademarks, trade names, and logos that the Mtron Group uses in its operations as of the date hereof.

5.2Books and Records.  Prior to or as promptly as practicable after the Distribution and from time to time thereafter as requested by Mtron, LGL shall deliver or cause to be delivered to Mtron all corporate books and records of the Mtron Group in the possession of LGL and the relevant portions (or copies thereof) of all corporate books and records of LGL or any member of the LGL Group relating directly and primarily to the Mtron Group and its businesses, assets and liabilities, including, in each case, all agreements, litigation files, government filings and tax records and files.  From and after the Distribution, all such books, records and copies shall be the property of Mtron.  LGL may retain copies of all such corporate books and records, subject to the provisions of Section 5.5 below.

5.3Access to Information.  Upon reasonable notice, each Party shall, and shall cause its Subsidiaries to afford to Representatives of the other Party reasonable access, during normal business hours throughout the period prior to and following the Distribution, to all of its

7

---

 

properties, books, contracts, commitments, and records (including, but not limited to, tax returns) relating to the other Party, its business or its Liabilities and, during such period, each Party shall, and shall cause its Subsidiaries to, furnish promptly to the other Party (i) access to each report, schedule and other document filed or received by it or any of its Subsidiaries pursuant to the requirements of federal or state securities laws or filed with or sent to any federal or state regulatory agency or commission and (ii) access to all information concerning themselves, their Subsidiaries, directors, officers and stockholders and such other matters as may be reasonably requested by the other Party in connection with any filings, applications or approvals required or contemplated by this Agreement or for any other reason related to the transactions contemplated by this Agreement; provided, however, that Mtron and the Mtron Group shall be required to grant such access only with respect to information necessary to or required by LGL in preparation of tax returns.  Subject to Section 5.6, nothing in this Section 5.3 shall require the Parties to take any action or furnish any access or information which would cause or could reasonably be expected to cause the waiver of any applicable attorney-client privilege.  All information for which access is provided hereunder shall be subject to the confidentiality provisions of Section 5.5.

5.4Retention of Records.  If any information relating to the businesses, assets and liabilities of the LGL Group or the Mtron Group is retained by the Mtron Group or the LGL Group, respectively, each of LGL and Mtron shall, and shall cause the other members of the LGL Group and the Mtron Group, respectively, to retain all such information in the LGL Group’s or the Mtron Group’s possession or under its control until such information is at least ten (10) years old, except that if, prior to the expiration of such period, any member of the LGL Group or the Mtron Group wishes to destroy or dispose of any such information that is at least three years old, prior to destroying or disposing of any of such information, (a) LGL or Mtron, on behalf of the member of the LGL Group or the Mtron Group that is proposing to dispose of or destroy any such information, shall provide no less than 45 days’ prior written notice to the other Party, specifying the information proposed to be destroyed or disposed of, and (b) if, prior to the scheduled date of such destruction or disposal, the other Party requests in writing that any of the information proposed to be destroyed or disposed of be delivered to such other Party, LGL or Mtron, as applicable, shall promptly arrange for the delivery of the requested information to a location specified by, and at the expense of, the requesting Party.  Notwithstanding any of the above, each Party shall retain those documents as required by law, rule, regulation, or court order.

5.5Confidentiality.

(a)Each Party hereto shall keep and shall cause its Representatives to keep each of the other Parties’ Information strictly confidential and will disclose such Information only to such of its Representatives who need to know such Information and who agree to be bound by this Section 5.5 and not to disclose such Information to any other Person, except as set forth in Section 5.5(b).  Without the prior written consent of the other Party, neither Party nor any of its respective Representatives shall disclose any other Party’s Information to any Person or entity except as may be required by law or judicial process and in accordance with Section 5.5(b).

(b)In the event that any Party or any of its Representatives receives a request or is required by law or judicial process to disclose to a court or other tribunal all or any part of any of

8

---

 

the other Party’s Information, each receiving Party or its Representatives shall promptly notify the other Party of the request in writing, and consult with and assist the other Party in seeking a protective order or request for other appropriate remedy.  In the event that such protective order or other remedy is not obtained or the other Party waives compliance with the terms hereof, such receiving Party or its Representatives, as the case may be, shall disclose only that portion of the Information or facts which, in the written opinion of each receiving Party’s outside counsel, is legally required to be disclosed, and each Party will exercise its respective commercially reasonable best efforts to assure that confidential treatment will be accorded such Information or facts by the Persons or entities receiving the same.  Each providing Party will be given an opportunity to review the Information or facts prior to disclosure.

5.6Privileged Information.

(a)Each Party hereto acknowledges that (i) each member of the LGL Group and each member of the Mtron Group has or may obtain Information regarding a member of the Mtron Group or the LGL Group, respectively, or any of its operations, employees, assets or liabilities, as applicable, that is or may be protected from disclosure pursuant to attorney-client privilege, the work product doctrine or other applicable privileges (“Privileged Information”); (ii) actual, threatened or future litigation, investigations, proceedings (including arbitration), claims, or other legal matters have been or may be asserted by or against, or otherwise affect, LGL and/or Mtron (or the LGL Group and/or the Mtron Group) (“Litigation Matters”); (iii) LGL and Mtron have a common legal interest in Litigation Matters, in the Privileged Information, and in the preservation of the confidential status of the Privileged Information, in each case relating to, as applicable, the LGL Group and its business, assets and liabilities or the Mtron Group and its business, assets and liabilities as it or they existed at the time of the Distribution or relating to or arising in connection with the relationship between the constituent elements of the LGL Group and the Mtron Group on or prior to the time of the Distribution; and (iv) LGL and Mtron intend that the transactions contemplated by this Agreement, the Administrative Agreement and any transfer of Privileged Information in connection herewith or therewith shall not operate as a waiver of any potentially applicable privilege.

(b)Each of LGL and Mtron agrees, on its own behalf and on behalf of the LGL Group and the Mtron Group, respectively, not to disclose or otherwise waive any privilege attaching to any Privileged Information relating to, as applicable, the LGL Group and its businesses, assets and liabilities, or the Mtron Group and its businesses, assets and liabilities as it or they existed at the time of the Distribution or relating to or arising in connection with the relationship between the constituent elements of the LGL Group and the Mtron Group on or prior to the time of the Distribution, without providing prompt written notice to and obtaining the prior written consent of the other, which consent shall not be unreasonably withheld, conditioned or delayed if the other Party certifies that such disclosure is to be made in response to a likely threat of suspension, debarment, criminal indictment, or similar action; provided, however, that LGL and Mtron may make disclosure or waiver with respect to Privileged Information if such Privileged Information related, in the case of LGL, solely to the LGL Group and its businesses, assets and liabilities as each existed prior to the time of the Distribution, or in the case of Mtron, solely to Mtron Group and its businesses, assets and liabilities as each existed prior to the time of the Distribution.  The Parties will use commercially reasonable efforts to limit any such disclosure or

9

---

 

waiver to the maximum extent possible and shall seek the execution of a confidentiality agreement by the third party or parties to which such disclosure or waiver is made.

(c)Upon any member of the LGL Group or the Mtron Group, as the case may be, receiving any subpoena or other compulsory disclosure notice from a court, other governmental agency or otherwise that requests disclosure of Privileged Information, in each case relating to LGL Group and its businesses, assets and liabilities or the Mtron Group and its businesses, assets and liabilities as it or they existed at the time of the Distribution or relating to or arising in connection with the relationship between the constituent elements of the LGL Group and the Mtron Group on or prior to the time of the Distribution, the recipient of the notice shall promptly provide to LGL, in the case of receipt by a member of the Mtron Group, or to Mtron, in the case of receipt by a member of the LGL Group, a copy of such notice, the intended response, and all materials or information relating to the other Party (or its Subsidiaries) that might be disclosed.  In the event of a disagreement as to the intended response or disclosure, unless and until the disagreement is resolved, LGL and Mtron shall cooperate to assert all defenses to disclosure claimed by either Party (or its Subsidiaries), at the cost and expense of the Party claiming such defense to disclosure, and shall not disclose any disputed documents or information until all legal defenses and claims of privilege shall have been determined.

5.7Cooperation.  The Parties shall cooperate with each other in all reasonable respects to ensure that the transactions contemplated herein are carried out in accordance with their terms.

5.8[Reserved.]

5.9Transaction Expenses.  Except as otherwise agreed between the Parties, LGL and Mtron shall each be responsible for its out-of-pocket expenses (including attorney’s fees) incurred in connection with the Distribution.

5.10Receivables Collection and Other Payments.  If, after the Distribution, any member of the LGL Group or the Mtron Group receives payments belonging to the Mtron Group or the LGL Group, respectively, the recipient shall promptly account for and remit same to the other Party.

5.11Insurance.  From and after the time of the Distribution, (a) LGL shall maintain, at its sole cost and expense, all insurance coverage existing at the time of the Distribution related to the Mtron Group and its businesses and assets for periods prior to the Distribution (and shall include Mtron or the members of the Mtron Group, as applicable, as a named insurer thereunder), (b) LGL shall be responsible for obtaining and maintaining all insurance coverage relating to the LGL Group and its businesses and assets for periods prior to and after the Distribution, and (c) Mtron shall be responsible for obtaining and maintaining all insurance coverage relating to the Mtron Group and its businesses and assets for the period from and after the Distribution.  Without limiting the foregoing, the businesses and assets of the Mtron Group insured pursuant to clause (a) above shall include any and all rights of an insured party, including without limitation rights of indemnity, the right to be defended by or at the expense of the insurer and the right to receive insurance proceeds.  The Parties hereto shall cooperate with regards to the administration of insurance policies contemplated hereunder (including accounting and reporting obligations and the distribution of insurance proceeds) and shall share material

10

---

 

information concerning such matters so that both LGL and Mtron are aware on a continuing basis of material matters relevant to joint dealings with insurers.  Except as set forth herein, nothing in this Agreement shall be construed or deemed to limit the right of LGL or Mtron to obtain and administer future insurance policies on whatever terms such Party believes to be advisable.

ARTICLE VI
Indemnification and Releases

6.1Mutual Release.  Effective as of the Distribution and except as otherwise specifically set forth in this Agreement, each of LGL on the one hand, and Mtron, on the other hand, releases and forever discharges the other Party or Parties and their respective Affiliates, and its and their directors, officers, employees and agents of and from all debts, demands, actions, causes of action, suits, accounts, covenants, contracts, agreements, damages, and any and all claims, demands and liabilities whatsoever of every name and nature, both in law and in equity, against each such other Party or any of its assigns, which each releasing Party has or ever had, which arise out of or relate to events, circumstances or actions taken by each such other Party prior to the Distribution; provided, however, that the foregoing general release shall not apply to this Agreement, or the transactions contemplated hereby, and shall not affect each Party’s right to enforce this Agreement or any other agreement contemplated hereby in accordance with its terms.  Each Party understands and agrees that, except as otherwise specifically provided herein, neither the other Party or Parties nor any of their Subsidiaries is, in this Agreement or any other agreement or document, representing or warranting to any Party in any way as to Party’s business, assets and liabilities or as to any consents or approvals required in connection with the consummation of the transactions contemplated by this Agreement.

6.2Indemnification by LGL.  From and after the time of the Distribution, LGL shall indemnify, defend and hold harmless the Mtron Group and each of their respective directors, officers, employees, agents, and Affiliates, and each of the heirs, executors, successors and assigns of any of the foregoing (the “Mtron Indemnitees”) from and against any and all losses, Liabilities and damages, including the costs and expenses of any and all actions, threatened actions, demands, assessments, judgments, settlements, and compromises relating thereto, attorneys’ fees, and any and all expenses whatsoever reasonably incurred in investigating, preparing, or defending against any such actions or threatened actions (collectively, “Mtron Indemnifiable Losses” and, individually, a “Mtron Indemnifiable Loss”) incurred or suffered by a Mtron Indemnitee arising out of (a) the failure or alleged failure of LGL or any of its Subsidiaries to pay, perform or otherwise discharge in due course any of the LGL Group liabilities, (b) the breach by LGL of any its obligations under this Agreement, and (c) any untrue statement or alleged untrue statement of a material fact (i) contained in any document filed with the SEC by LGL pursuant to the Securities Act, the Exchange Act or any other applicable securities rule, regulation or law, (ii) otherwise disclosed to investors or potential investors in any member of the LGL Group by any member of the LGL Group, or (iii) furnished to any Mtron Indemnitee by any member of the LGL Group for inclusion in any public disclosures to be made by any Mtron Indemnitee, including filings with the SEC or disclosures to investors or potential investors in any member of the Mtron Group, or any omission or alleged omission to state in any information described in clauses (i), (ii) or (iii) above a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not

11

---

 

misleading.  Notwithstanding the foregoing, indemnification will be available under clause (c) of this Section 6.2 only to the extent that those Mtron Indemnifiable Losses are caused by any such untrue statement or omission or alleged untrue statement or omission, and the information which is the subject of such untrue statement or omission or alleged untrue statement or omission was not supplied after the Distribution by a member of the Mtron Group or an agent thereof acting on its behalf.

6.3Indemnification by Mtron.  From and after the time of the Distribution, Mtron shall indemnify, defend and hold harmless the LGL Group and each of their respective directors, officers, employees, agents, and Affiliates, and each of the heirs, executors, successors, and assigns of any of the foregoing (the “LGL Indemnitees”) from and against any and all losses, Liabilities, and damages, including the costs and expenses of any and all actions, threatened actions, demands, assessments, judgments, settlements, and compromises relating thereto, attorneys’ fees, and any and all whatsoever reasonably incurred in investigating, preparing, or defending against any such actions or threatened actions (collectively, “LGL Indemnifiable Losses” and, individually, a “LGL Indemnifiable Loss”) incurred or suffered by a LGL Indemnitee arising out of (a) the failure or alleged failure of Mtron or any of its Subsidiaries to pay, perform or otherwise discharge in due course any of the Mtron Group liabilities, (b) the breach by Mtron of any of its respective obligations under this Agreement, and (c) any untrue statement or alleged untrue statement of a material fact (i) contained in any document filed with the SEC by Mtron following the Distribution pursuant to the Securities Act, the Exchange Act, or any other applicable securities rule, regulation or law, (ii) otherwise disclosed following the Distribution to investors or potential investors in any member of the Mtron Group by any member of the Mtron Group, or (iii) furnished to any LGL Indemnitee by any member of the Mtron Group for inclusion in any public disclosures to be made by any LGL Indemnitee, including filings with the SEC or disclosures to investors or potential investors in any member of the LGL Group; or any omission or alleged omission to state in any information described in clauses (i), (ii) or (iii) above a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.  Notwithstanding the foregoing, indemnification will be available under clause (c) of this Section 6.3 only to the extent that those LGL Indemnifiable Losses are caused by any such untrue statement or omission or alleged untrue statement or omission, and the information which is the subject of such untrue statement or omission or alleged untrue statement or omission was not supplied by a member of the LGL Group or an agent thereof acting on its behalf.  The Mtron Indemnifiable Losses and the LGL Indemnifiable Losses are collectively referred to as the “Indemnifiable Losses.”

6.4Taxes.  Mtron agrees to indemnify and hold harmless each member of the LGL Group from and against (i) any and all Distribution Taxes resulting from or attributable to any act or failure to act on the part of any member of the Mtron Group following the Distribution and (ii) all liabilities, costs, expenses (including, without limitation, reasonable expenses of investigation and attorney’s fees and expenses), losses, damages, assessments, settlements, or judgments arising out of or incident to the imposition, assessment, or assertion of any tax or adjustment described in this subsection.

6.5Insurance Proceeds, Tax Benefits; Mitigation.  The amount which any Party (an “Indemnifying Party”) is or may be required to pay to any other Person (an “Indemnitee”) pursuant to Sections 6.2 or 6.3 above shall be reduced (including retroactively) by (i) any

12

---

 

insurance proceeds or other amounts actually recovered by or on behalf of each such Indemnitee in reduction of the related Indemnifiable Loss and (ii) any tax benefits realized by each such Indemnitee based on the actual reduction in tax liability by reason of such loss (and shall be increased by any tax liability incurred by each such Indemnitee based on such indemnity payment).  If an Indemnitee shall have received the payment required by this Agreement from an Indemnifying Party in respect of an Indemnifiable Loss and shall subsequently actually receive insurance proceeds, tax benefits, or other amounts in respect of such Indemnifiable Loss as specified above, then each such Indemnitee shall pay to each such Indemnifying Party a sum equal to the amount of such insurance proceeds, tax benefits actually realized, or other amounts actually received.  Each Indemnitee shall take all reasonable steps to mitigate all losses, including availing itself of any defenses, limitations, rights of contribution, claims against third parties and other rights at law (it being understood that any reasonable out-of-pocket costs paid to third parties in connection with such mitigation shall constitute losses) and shall provide such evidence and documentation of the nature and extent of any loss as may be reasonably requested by each Indemnifying Party.

6.6Procedure for Indemnification.

(a)If an Indemnitee shall receive notice or otherwise learn of the assertion by a Person (including any governmental entity) who is not a party to this Agreement or to any of the Ancillary Agreements of any claim or of the commencement by any such Person of any action (a “Third-Party Claim”) with respect to which an Indemnifying Party may be obligated to provide indemnification pursuant to this Agreement, each such Indemnitee shall give each such Indemnifying Party written notice thereof promptly after becoming aware of such Third-Party Claim; provided, however, that the failure of any Indemnitee to give notice as required by this Section 6.6 shall not relieve each Indemnifying Party of its obligations under this ARTICLE VI, except to the extent that each such Indemnifying Party is prejudiced by such failure to give notice.  Such notice shall describe the Third-Party Claim in reasonable detail and shall indicate the amount (estimated if necessary) of the Indemnifiable Loss that has been or may be sustained by each such Indemnitee.

(b)An Indemnifying Party may elect to defend or to seek to settle or compromise, at such Indemnifying Party’s own expense and by such Indemnifying Party’s own counsel reasonably acceptable to each Indemnitee, any Third-Party Claim, provided that the Indemnifying Party must confirm in writing that it agrees that each Indemnitee is entitled to indemnification hereunder in respect of such Third-Party Claim.  Within 30 days of the receipt of notice from an Indemnitee in accordance with Section 6.6(a) (or sooner, if the nature of such Third-Party Claim so requires), the Indemnifying Party shall notify each Indemnitee of its election whether to assume responsibility for such Third-Party Claim (provided that if the Indemnifying Party does not so notify each Indemnitee of its election within 30 days after receipt of such notice from each Indemnitee, the Indemnifying Party shall be deemed to have elected not to assume responsibility for such Third-Party Claim), and each Indemnitee shall cooperate in the defense or settlement or compromise of such Third-Party Claim.  After notice from an Indemnifying Party to each Indemnitee of its election to assume responsibility for a Third-Party Claim, such Indemnifying Party shall not be liable to each such Indemnitee under this ARTICLE VI for any legal or other expenses (except expenses approved in advance by the Indemnifying Party) subsequently incurred by each such Indemnitee in connection with the

13

---

 

defense thereof; provided, however, that if the defendants in any such claim include both the Indemnifying Party and one or more Indemnitees and in such Indemnitees’ reasonable judgment there exists a conflict of interest between such Indemnitees and the Indemnifying Party, such Indemnitees shall have the right to employ separate counsel and in that event the reasonable fees and expenses of such separate counsel (but not more than one separate counsel reasonably satisfactory to the Indemnifying Party) shall be paid by each such Indemnifying Party.  If any Indemnifying Party elects not to assume responsibility for a Third-Party Claim (which election may be made only in the event of a good faith dispute that a claim was inappropriately tendered under Section 6.2 or 6.3, as the case may be), each such Indemnitee may defend or (subject to the following sentence) seek to compromise or settle such Third-Party Claim without prior written notice to each such Indemnifying Party, which shall have the option within fifteen days following the receipt of such notice (i) to reject the settlement and assume all past and future responsibility for the claim, including reimbursing each Indemnitee for prior expenditures in connection with the claim, (ii) to reject the settlement and continue to refrain from participation in the defense of the claim, in which event each such Indemnifying Party shall have no further right to contest the amount or reasonableness of the settlement if each Indemnitee elects to proceed therewith, (iii) to approve the amount of the settlement, reserving each such Indemnifying Party’s right to contest each Indemnitee’s right to indemnity, or (iv) to approve and agree to pay the settlement.  In the event such Indemnifying Party makes no response to such written notice from an Indemnitee, the Indemnifying Party shall be deemed to have elected option (ii).

(c)If an Indemnifying Party chooses to defend or to seek to compromise any Third-Party Claim, each Indemnitee shall make available to such Indemnifying Party any personnel and any books, records, or other documents within its control or which it otherwise has the ability to make available that are necessary or appropriate for such defense, within the reasonable discretion of each such Indemnifying Party.

(d)Notwithstanding anything else in this Section 6.6 to the contrary, an Indemnifying Party shall not settle or compromise any Third-Party Claim unless (i) such settlement or compromise contemplates as an unconditional term thereof the giving by such claimant or plaintiff to each Indemnitee of a written release from all liability in respect of such Third-Party Claim and (ii) such settlement does not provide for any non-monetary relief by any Indemnitee unless each such Indemnitee consents thereto.  In the event any Indemnitee shall notify the Indemnifying Party in writing that such Indemnitee declines to accept any such settlement or compromise, each such Indemnitee may continue to contest such Third-Party Claim free of any participation by such Indemnifying Party, at each such Indemnitee’s sole expense.  In such event, the obligation of such Indemnifying Party to each such Indemnitee with respect to such Third-Party Claim shall be equal to (i) the costs and expenses of each such Indemnitee prior to the date such Indemnifying Party notifies each such Indemnitee of such offer of settlement or compromise (to the extent such costs and expenses are otherwise indemnifiable hereunder) plus (ii) the lesser of (A) the amount of any offer of settlement or compromise which each such Indemnitee declined to accept and (B) the actual out-of-pocket amount each such Indemnitee is obligated to pay subsequent to such date as a result of each such Indemnitee’s continuing to pursue such Third-Party Claim.

14

---

 

(e)Any claim on account of an Indemnifiable Loss which does not result from a Third-Party Claim shall be asserted by written notice given by an Indemnitee to each applicable Indemnifying Party.  Each such Indemnifying Party shall have a period of 30 days after the receipt of such notice within which to notify each applicable Indemnitee of the Indemnifying Party’s response to the claim.  If each such Indemnifying Party does not so notify each such Indemnitee during such 30-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment.  If each such Indemnifying Party does not respond within such 30-day period or rejects such claim in whole or in part, each such Indemnitee shall be free to pursue such remedies as may be available to such Party under applicable law or under this Agreement or any other agreement or arrangement between the Parties.

(f)In addition to any adjustments required pursuant to Section 6.5, if the amount of any Indemnifiable Loss shall, at any time subsequent to the payment required by this Agreement, be reduced by recovery, settlement, or otherwise, the amount of such reduction, less any expenses incurred in connection therewith, shall promptly be repaid by each Indemnitee to each Indemnifying Party.

(g)In the event of payment by an Indemnifying Party to any Indemnitee in connection with any Third-Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right or claim relating to such Third-Party Claim against any claimant or plaintiff asserting such Third-Party Claim.  Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right or claim.

6.7Contribution.  If for any reason the indemnification provided for in Section 6.2 or 6.3 is unavailable to any Indemnitee, or is insufficient to hold such Indemnitee harmless, then the Indemnifying Party shall contribute to the amount paid or payable by that Indemnitee as a result of the untrue statement or omission or alleged untrue statement or omission of a material fact, in that proportion as is appropriate to reflect the relative fault of the Indemnifying Party, on the one hand, and the Indemnitee, on the other hand.  The relative fault shall be determined by reference to, among other things, whether the untrue statement or omission or alleged untrue statement or omission relates to information supplied by the Indemnifying Party or the Indemnitee, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.  The amount paid or payable by the Indemnitee referred to above in this Section 6.7 shall be deemed to include, for purposes of this Section 6.7, any legal or other expenses reasonably incurred by the Indemnitee in connection with investigating or defending any such action or claim.  Notwithstanding the foregoing, no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

6.8Remedies Cumulative.  The remedies provided in this ARTICLE VI shall be cumulative and shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party.

15

---

 

6.9Survival of Indemnities.  The obligations of each of Mtron and LGL under this ARTICLE VI shall survive the Separation and the Distribution, with respect to any Indemnifiable Loss of the other Parties.

6.10Tax Matter Not Covered Under This Agreement.  Other than as expressly addressed in this Agreement, any claim for indemnification with respect to any tax Liabilities of the LGL Group or the Mtron Group shall be governed by the Tax Indemnity and Sharing Agreement.

ARTICLE VII
Miscellaneous and General

7.1Representations and Warranties.  Each Party represents and warrants to the other Party that (a) it is validly existing and in good standing under the laws of the jurisdiction of incorporation, (b) it has the requisite corporate power and authority to carry on its business as conducted on the date hereof, (c) it has the corporate power and authority to execute, deliver, and perform its obligations under this Agreement and the Ancillary Agreements, (d) each of this Agreement and the Ancillary Agreements has been duly and validly executed by such Party and is the legal, valid and binding obligation of such Party enforceable in accordance with its terms, and (e) the execution and delivery of this Agreement and the Ancillary Agreements do not and will not (i) violate any provisions of such Party’s certificate or articles of incorporation or bylaws, (ii) violate any law applicable to such Party, (iii) violate any order, judgment, award, or decree of any court or Governmental Authority applicable to such Party, or (iv) result in any breach or default under any material contract by which such Party is bound.

7.2Modification or Amendment.  The Parties hereto may modify or amend this Agreement by written agreement executed and delivered by authorized officers of the respective Parties.

7.3Counterparts.  For the convenience of the Parties hereto, this Agreement may be executed in separate counterparts, each such counterpart being deemed to be an original instrument, and which counterparts shall together constitute the same agreement.

7.4Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of Florida, without reference to its conflicts of law principles.

7.5Notices.  Any notice, request, instruction or other document to be given hereunder by any Party to the other Party shall be in writing and shall be deemed to have been duly given (i) on the date of delivery if delivered by facsimile (upon confirmation of receipt) or personally, (ii) on the first business day following the date of dispatch if delivered by Federal Express or other next-day courier service, or (iii) on the third business day following the date of mailing if delivered by United States Certified Mail, return receipt requested, postage prepaid.  All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the Party to receive such notice:

16

---

 

If to LGL:

The LGL Group, Inc.
249 Royal Palm Way Suite 503
Palm Beach, FL 33480
Attention: Ivan Arteaga, Chief Financial Officer

If to Mtron:

M-tron Industries, Inc.
2525 Shader Road
Orlando, FL 32804
Attention: James W. Tivy, Chief Financial Officer

7.6Captions.  All Article, Section and paragraph captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof.

7.7No Third Party Beneficiary.  This Agreement is for the purpose of defining the respective rights and obligations of the Parties hereto and is not for the benefit of any employee, creditor, or other third party, except as may be expressly set forth herein.

7.8Assignment; Successors and Assigns.  No Party to this Agreement shall convey, assign or otherwise transfer any of its rights or obligations under this Agreement without the express written consent of each of the other Party hereto in its sole and absolute discretion.  Any such conveyance, assignment or transfer without the express written consent of each of the other Party shall be void ab initio.  No assignment of this Agreement or any rights hereunder shall relieve the assigning Party of its obligations hereunder.  Any successor by merger to a Party to this Agreement shall be substituted for such Party as a party to this Agreement and all obligations, duties, and liabilities of the substituted party under this Agreement shall continue in full force and effect as obligations, duties and liabilities of the substituting party, enforceable against the substituting party as a principal, as though no substitution had been made.

7.9Certain Obligations.  Whenever this Agreement requires any of the Subsidiaries of any Party to take any action, this Agreement will be deemed to include an undertaking on the part of such Party to cause such Subsidiary to take such action.

7.10Specific Performance.  In the event of any actual or threatened default in or breach of any of the terms, conditions and provisions of this Agreement, the Party or Parties who are or are to be thereby aggrieved shall have the right of specific performance and injunctive relief giving effect to its or their rights under this Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative.  The Parties agree that the remedies at law for any breach or threatened breach, including monetary damages, are inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is hereby waived.

17

---

 

7.11Severability.  If any provision of this Agreement or the application thereof to any Person or circumstance is determined to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to Persons or circumstances other than those remaining provisions hereof, or the application of such provision to Persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any Party.  Upon any such determination, the Parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the Parties.

7.12Arbitration.  Any dispute with respect to this Agreement or any Ancillary Agreement shall be arbitrated in Orange County, Florida in accordance with the rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.  There will be a single neutral arbitrator selected who resides in Orange County, Florida.  The American Arbitration Association will provide a list of five (5) neutral arbitrators.  The claimant and respondent will take turns, with the respondent going first, striking one name at a time from the list of five neutral arbitrators.  Each Party will have no more than twenty-four (24) hours to take its turn striking a name of a neutral arbitrator.  The final remaining arbitrator will serve as the neutral arbitrator.  Either Party may apply to the arbitrator seeking injunctive relief until the arbitrator’s award is rendered or the controversy is otherwise resolved.  Either Party also may, without waiving any remedy under this Agreement or any Ancillary Agreement, seek from any Florida court having jurisdiction, any interim or provisional relief that is necessary to protect the rights and/or property of that Party, pending the determination of the arbitrator.

[Signatures being on the following page]

18

---

 

 

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the duly authorized officers of the Parties hereto as of the date first above written.

 

 

 

 

 

 

[Signature Page to Separation and Distribution Agreement]

---

 

 

Schedule 1.1(a)

Ancillary Agreements

Amended and Restated Transitional Administrative and Management Services Agreement, dated August 19, 2022, by and between The LGL Group, Inc. and M-tron Industries, Inc.

Amended and Restated Tax Indemnity and Sharing Agreement, dated August 19, 2022, by and between The LGL Group, Inc. and M-tron Industries, Inc.

 

Schedule 1.1(a) to Separation and Distribution Agreement

---

 

 

Schedule 1.1(b)

Mtron Subsidiaries

 

Schedule 1.1(b) to Separation and Distribution Agreement

---

 

 

 

 

 

---

 

 

 

 

 

M-tron Industries, Inc.

Amended and Restated 2022 Incentive Plan

Article 1

Establishment and Purpose

1.1Establishment of the Plan. M-tron Industries, Inc., a Delaware corporation (the “Company”), previously established a 2022 Incentive Plan on August 3, 2022 (the “Previous Plan”). The Company hereby replaces the Previous Plan with an amended and restated incentive compensation plan (as amended from time to time, the “Plan”), as set forth in this document.

1.2Purpose of the Plan. The purposes of the Plan are to (a) enable the Company and any Affiliate to attract and retain the types of Employees, Consultants and Directors who will contribute to the Company’s long-range success; (b) provide incentives that align the interests of Employees, Consultants and Directors with those of stockholders of the Company; and (c) promote the success of the Company’s business.

1.3Effective Date of the Plan. The Plan is effective as of the date the Plan is approved by the Company’s stockholders (the “Effective Date”). The Plan will be deemed to be approved by the stockholders if it receives the affirmative vote of a majority of the votes cast at a meeting duly held in accordance with the applicable provisions of the Company’s Bylaws.

1.4Duration of the Plan.  Unless sooner terminated as provided herein, the Plan shall terminate ten (10) years from the Effective Date. After the Plan is terminated, no Awards may be granted but Awards previously granted shall remain outstanding in accordance with their applicable terms and conditions and the Plan’s terms and conditions.

Article 2

Definitions

Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized:

2.1“Affiliate” means, with respect to any Person, any other Person that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with, the Person in question, including any subsidiary. As used herein, the term “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. As used herein, the term “subsidiary” means any corporation, partnership, venture or other entity in which the Company holds, directly or indirectly, a fifty percent (50%) or greater ownership interest.

2.2“Applicable Law” means any applicable law, including without limitation: (a) provisions of the Code, the Securities Act, the Exchange Act and any rules or regulations thereunder; (b) corporate, securities, tax or other laws, statutes, rules, requirements or regulations, whether federal, state, local or foreign; and (c) rules of any securities exchange or automated quotation system on which the Shares are listed, quoted or traded.

2.3“Award” means, individually or collectively, a grant or award under this Plan of Options, Stock Appreciation Rights, Restricted Stock (including unrestricted Stock), Restricted Stock Units, Performance Stock Units, Performance Shares, Deferred Stock Awards, Other Stock-Based Awards, Dividend Equivalent Awards and Performance Bonus Awards, in each case subject to the terms of the Plan.

2.4“Award Agreement” means an agreement, certificate, resolution or other type or form of writing or other evidence approved by the Committee which sets forth the terms and conditions of an Award. An Award Agreement may be in any electronic medium, may be limited to a notation on the books and records of the Company and, with the approval of the Committee, need not be signed by a representative of the Company or a Participant. In the event of any inconsistency between the Plan and an Award Agreement, the terms of the Plan shall govern.

2.5“Beneficial Owner” or “Beneficial Ownership” has the meaning ascribed to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act.

 

---

 

2.6“Board” or “Board of Directors” means the Company’s Board of Directors.

2.7“Cause” means, except as otherwise defined in an Award Agreement, a Participant’s: (a) conviction of, or the entry of a plea of guilty or no contest to, a felony or any other crime that causes the Company or its Affiliates public disgrace or disrepute, or materially and adversely affects the Company’s or its Affiliates’ operations or financial performance or the relationship the Company has with its customers; (b) gross negligence or willful misconduct with respect to the Company or any of its Affiliates, including, without limitation fraud, embezzlement, theft or proven dishonesty in the course of his or her employment or other service; (c) refusal to perform any lawful, material obligation or fulfill any duty (other than any duty or obligation of the type described in clause (e) below) to the Company or its Affiliates (other than due to a Disability), which refusal, if curable, is not cured within fifteen (15) days after delivery of written notice thereof; (d) material breach of any agreement with or duty owed to the Company or any of its Affiliates, which breach, if curable, is not cured within fifteen (15) days after the delivery of written notice thereof; or (e) any breach of any obligation or duty to the Company or any of its Affiliates (whether arising by statute, common law or agreement) relating to confidentiality, noncompetition, nonsolicitation or proprietary rights.  Notwithstanding the foregoing, if a Participant and the Company (or any of its Affiliates) have entered into an employment agreement, consulting agreement or other similar agreement that specifically defines “cause,” then with respect to such Participant, “Cause” shall have the meaning defined in that employment agreement, consulting agreement or other agreement.

2.8“Change in Control” shall be deemed to have occurred if:

(a)any Person, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities;

(b)during any annual period, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new Director whose election by the Board of Directors or nomination for election by the Company’s stockholders was approved by a vote of a majority of the Directors then still in office who either were Directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, provided that this does not apply to a Director whose initial assumption of office during the lookback period is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of Directors of the Company;

(c)the consummation of a merger or consolidation of the Company with any other business entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation;

(d)the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets; or

(e)consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets.

Notwithstanding the foregoing, if a Change in Control constitutes a payment event with respect to any Award (or any portion of an Award) that provides for the deferral of compensation that is subject to Section 409A of the Code, to the extent required to avoid the imposition of additional taxes under Section 409A of the Code, the transaction or event described in subsection (a), (b), (c) or (d) with respect to such Award (or portion thereof) shall only constitute a Change in Control for purposes of the payment timing of such Award if such transaction also constitutes a “change in control event,” as defined in Treasury Regulation Section 1.409A-3(i)(5).

The Committee shall have full and final authority, which shall be exercised in its sole discretion, to determine conclusively whether a Change in Control has occurred pursuant to the above definition, the date of the occurrence of such Change in Control and any incidental matters relating thereto; provided that any exercise of authority in conjunction with a determination of whether a Change in Control is a “change in control event” as defined in Treasury Regulation Section 1.409A-3(i)(5) shall be consistent with such regulation.

2

---

 

2.9“Code” means the Internal Revenue Code of 1986, as amended from time to time, and the Treasury Regulations issued thereunder.

2.10“Committee” has the meaning set forth in Section 3.1.

2.11“Company” has the meaning set forth in Section 1.1.

2.12“Consultant” means any individual or entity who renders bona fide services to the Company or an Affiliate, other than as an Employee or Director, provided that such services are not in connection with the offer or sale of securities in a capital-raising transaction and do not, directly or indirectly, promote or maintain a market for the Company’s or its Affiliates’ securities.

2.13“Deferred Stock” means a right to receive a specified number of shares of Stock during specified time periods pursuant to Article 9.

2.14“Director” means a member of the Board.

2.15“Disability” means, unless otherwise determined by the Committee or determined in the applicable Award Agreement, that the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment; provided, however, that to entitle a Participant to an extended exercise period for an Incentive Stock Option, the Participant must be described in Section 22(e)(3) of the Code. Notwithstanding the foregoing, for Awards subject to Section 409A of the Code, Disability shall mean that a Participant is disabled under Section 409A(a)(2)(C)(i) or (ii) of the Code. Notwithstanding the above, the Committee may rely on any determination that a Participant is disabled for purposes of benefits under any long-term disability plan maintained by the Company or any Affiliate in which a Participant participates.

2.16“Dividend Equivalent” means a right granted to a Participant pursuant to Article 9 to receive the equivalent value (in cash or Stock) of dividends paid on Stock.

2.17“Effective Date” has the meaning set forth in Section 1.3.

2.18“Eligible Person” means any person who is an employee, officer, director, consultant, advisor or other individual service provider of the Company or any Affiliate, or any person who is determined by the Committee to be a prospective employee, officer, director, consultant, advisor or other individual service provider of the Company or any Affiliate.

2.19 “Employee” means any person employed by the Company, its Affiliates and/or Subsidiaries; provided, that, for purposes of determining eligibility to receive Incentive Stock Options, an Employee shall mean an employee of the Company or a parent or subsidiary corporation within the meaning of Section 424 of the Code. Mere service as a Director or payment of a director’s fee by the Company or an Affiliate shall not be sufficient to constitute “employment” by the Company or an Affiliate.

2.20“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.

2.21“Exercise Price” means the price at which a Share may be purchased by a Participant pursuant to an Option, as determined by the Committee.

2.22“Fair Market Value” or “FMV” means, as of any date, unless otherwise determined by the Committee or determined in an applicable Award Agreement, the value of Stock determined as follows:

(a)If the Stock is listed on one or more established stock exchanges or national market systems, including without limitation, The New York Stock Exchange American (“NYSE”), its Fair Market Value shall be the closing sales price for such Stock (or the closing bid, if no sales were reported) as quoted on the principal exchange or system on which the Stock is listed (as determined by the Committee) on the date of determination (or, if no closing sales price or closing bid was reported on that date, as applicable, on the last immediately preceding trading date such closing sales price or closing bid was reported), as reported in The Wall Street Journal or such other source as the Committee deems reliable;

3

---

 

(b)If the Stock is regularly quoted on an automated quotation system (including the OTC Bulletin Board) or by a recognized securities dealer, its Fair Market Value shall be the closing sales price for such Stock as quoted on such system or by such securities dealer on the date of determination, but if selling prices are not reported, the Fair Market Value of a share of Stock shall be the mean between the high bid and low asked prices for the Stock on the date of determination (or, if no such prices were reported on that date, on the last date such prices were reported), as reported in The Wall Street Journal or such other source as the Committee deems reliable; or

(c)In the absence of an established market for the Stock of the type described in (a) and (b), above, the Fair Market Value thereof shall be determined by the Committee in good faith using any reasonable method of valuation, which method may be set forth with greater specificity in the Award Agreement, (and, to the extent necessary or advisable, in a manner consistent with Section 409A of the Code and Section 422 of the Code for Incentive Stock Options), which determination shall be conclusive and binding on all interested parties.  Such reasonable method may be determined by reference to (i) the placing price of the latest private placement of the Shares and the development of the Company’s business operations and the general economic and market conditions since such latest private placement; (ii) other third party transactions involving the Shares and the development of the Company’s business operation and the general economic and market conditions since such sale; (iii) an independent valuation of the Shares (by a qualified valuation expert); or (iv) such other methodologies or information as the Committee determines to be indicative of Fair Market Value.

2.23“Incentive Stock Option” means an Option that is intended to qualify as an “incentive stock option” within the meaning of Section 422 of the Code and that meets the requirements set out in the Plan.

2.24“Insider” means an individual who is, on the relevant date, an officer, director, or ten percent (10%) beneficial owner of the Company, as those terms are defined under Section 16 of the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the Exchange Act.

2.25“Non-Employee Director” means a member of the Board who is not an Employee of the Company.

2.26“Non-Qualified Stock Option” means an Option that, by its terms, does not qualify or is not intended to qualify as an Incentive Stock Option.

2.27“Option” means the right to purchase Stock granted to a Participant in accordance with Article 6. Options granted under the Plan may be Non-Qualified Stock Options, Incentive Stock Options or a combination thereof.

2.28“Other Stock-Based Award” means an equity-based or equity-related Award not otherwise described by the terms of the Plan, granted pursuant to Article 9.

2.29“Participant” means an Eligible Person to whom an Award is granted under the Plan or, if applicable, such other person who holds an outstanding Award.

2.30“Performance Goal” means any goals established by the Committee pursuant to an Award, which may be based on the attainment of specified levels of one or more of the following: (i) earnings per share; (ii) sales; (iii) operating income; (iv) gross income; (v) basic or adjusted net income (before or after taxes); (vi) cash flow; (vii) gross profit; (viii) gross or operating margin; (ix) working capital; (x) earnings before interest and taxes; (xi) earnings before interest, tax, depreciation and amortization; (xii) return measures, including return on invested capital, sales, assets, or equity; (xiii) revenues; (xiv) market share; (xv) the price or increase in price of Stock; (xvi) total shareholder return; (xvii) economic value created or added; (xviii) expense reduction; (xix) implementation or completion of critical projects, including acquisitions, divestitures, and other strategic objectives, including market penetration and product development; (xx) specified objectives with regard to limiting the level of increase in all or a portion of the Company's bank debt or other long‑term or short‑term public or private debt or other similar financial obligations of the Company; or (xxi) any other metric that may be determined by the Committee.  Such performance goals also may be based solely by reference to the Company’s performance or the performance of a Subsidiary, division, business segment or business unit of the Company or a Subsidiary, or based upon performance relative to performance of other companies or upon comparisons of any of the indicators of performance relative to performance of other companies.  The Committee may provide for exclusion of the impact of an event or occurrence which the Committee determines should appropriately be excluded, including (a) restructurings, discontinued operations, extraordinary items, and other unusual, infrequently occurring or non-recurring charges or events, (b) asset write-downs, (c) litigation or claim judgments or settlements, (d) acquisitions or divestitures, (e) reorganization or change in the corporate structure or capital structure of the Company, (f) an event either not directly related to the operations of the Company, Subsidiary, division, business segment or business unit or not within the reasonable control of management, (g) foreign exchange gains and losses, (h) a change in the fiscal year of the Company, (i) the refinancing or repurchase of bank loans or debt securities, (j),

4

---

 

unbudgeted capital expenditures, (k) the issuance or repurchase of equity securities and other changes in the number of outstanding shares, (l) conversion of some or all of convertible securities to common stock, (m) any business interruption event (n) the cumulative effects of tax or accounting changes in accordance with U.S. generally accepted accounting principles, or (o) the effect of changes in other laws or regulatory rules affecting reported results. The Committee may adjust upwards or downwards the amount payable pursuant to such performance-based Award, and the Committee shall certify the amount of any such Award for the applicable performance period before payment is made.

2.31“Performance Period” means one or more periods of time, which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to, and the payment of, Performance Stock Units and Performance Shares.

2.32“Performance Stock Unit” and “Performance Share” each mean an Award granted to an Employee pursuant to Article 9 herein.

2.33“Permitted Transferee” shall mean, with respect to a Participant, any “family member” of the Participant, as defined in the General Instructions to Form S-8 Registration Statement under the Securities Act (or any successor form thereto), or to any other transferee specifically approved by the Committee after taking into account Applicable Law, but excluding any third-party financial institutions.

2.34“Person” has the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) thereof.

2.35“Plan” means this M-tron Industries, Inc. 2022 Incentive Plan, as it may be amended from time to time.

2.36 “Restricted Stock” means Stock awarded to a Participant pursuant to Article 8 as to which the Restriction Period has not lapsed.

2.37“Restricted Stock Unit” means an Award granted pursuant to Section 8.9 as to which the Restriction Period has not lapsed.

2.38“Restriction Period” means the period when Restricted Stock or Restricted Stock Units are subject to a “substantial risk of forfeiture” within the meaning of Section 83 of the Code (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee, in its discretion), as provided in Article 8.

2.39“Securities Act” means the Securities Act of 1933, as amended.

2.40“Share” means a share of Stock of the Company.

2.41“Stock” means the common stock of the Company, par value $0.01 per share.

2.42“Stock Appreciation Right” or “SAR” means a right granted pursuant to Article 7 to receive an amount payable in cash or Shares equal to the excess of (a) the Fair Market Value of a specified number of Shares on the date the SAR is exercised over (b) the Fair Market Value of such Shares on the date the SAR was granted as set forth in the applicable Award Agreement.

2.43“Subsidiary” means any corporation, partnership, venture, unincorporated association or other entity in which the Company holds, directly or indirectly, a fifty percent (50%) or greater ownership interest, provided, however, that with respect to an Incentive Stock Option, a Subsidiary must be a corporation. The Committee may, at its sole discretion, designate, on such terms and conditions as the Committee shall determine, any other corporation, partnership, limited liability company, venture, or other entity a Subsidiary for purposes of this Plan.

2.44“Ten Percent Owner” means a person who owns, or is deemed within the meaning of Section 424(d) of the Code to own, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or any parent or subsidiary corporations of the Company, as defined in Sections 424(e) and (f), respectively, of the Code).  Whether a person is a Ten Percent Owner shall be determined with respect to an Option based on the facts existing immediately prior to the grant date of the Option.

5

---

 

2.45“Termination of Employment” or a similar reference means the event where the Employee is no longer an Employee of the Company or of any Subsidiary, including but not limited to where the employing company ceases to be a Subsidiary. With respect to any Participant who is not an Employee, “Termination of Employment” shall mean cessation of the performance of services. With respect to any Award that provides “non-qualified deferred compensation” within the meaning of Section 409A of the Code, “Termination of Employment” shall mean a “separation from service” as defined under Section 409A of the Code. Military or sick leave or other bona fide leave shall not be deemed a termination of employment, provided that it does not exceed the longer of three (3) months or the period during which the absent Participant’s reemployment rights, if any, are guaranteed by statute or by contract.

2.46“Treasury Regulation” or “Treas. Reg.” means any regulation promulgated under the Code, as such regulation may be amended from to time.

Article 3

Administration

3.1The Committee. Except as otherwise provided herein, the Plan shall be administered by the Compensation Committee of the Board (the “Committee”). Unless otherwise determined by the Board, the Committee shall consist solely of two or more members of the Board each of whom is (a) a “non-employee director” within the meaning of Rule 16b-3 of the Exchange Act, and (b) an “independent director” under the rules of the NYSE (or any similar rule or listing requirement that may be applicable to the Company from time to time); provided, that any action taken by the Committee shall be valid and effective, whether or not members of the Committee at the time of such action are later determined not to have satisfied the requirements for membership set forth in this Section 3.1 or otherwise provided in any charter of the Committee. Notwithstanding the foregoing: (a) the full Board, acting by a majority of its members in office or by designation to a Committee, shall conduct the general administration of the Plan with respect to all Awards granted to Non-Employee Directors and for purposes of such Awards the term “Committee” as used in this Plan shall be deemed to refer to the Board and (b) the Committee may delegate its authority hereunder to the extent permitted by Section 3.4. In its sole discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan except with respect to matters which under Rule 16b-3 under the Exchange Act, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. Except as may otherwise be provided in any charter of the Committee, appointment of Committee members shall be effective upon acceptance of appointment; Committee members may resign at any time by delivering written notice to the Board; and vacancies in the Committee may only be filled by the Board.

3.2Authority of the Committee. Subject to the general purposes, terms and conditions of this Plan and Applicable Law, and to the direction of the Board, the Committee shall have complete control over the administration of the Plan and shall have full authority to (a) exercise all of the powers granted to it under the Plan, (b) construe, interpret and implement the Plan, grant terms and grant notices, and all Award Agreements, (c) prescribe, amend and rescind rules and regulations relating to the Plan, including rules governing its own operations, (d) make all determinations necessary or advisable in administering the Plan, (e) correct any defect, supply any omission and reconcile any inconsistency in the Plan, (f) amend the Plan to reflect changes in applicable law (whether or not the rights of the holder of any Award are adversely affected, unless otherwise provided by the Committee), (g) grant Awards and determine who shall receive Awards, when such Awards shall be granted and the terms and conditions of such Awards, including, but not limited to, conditioning the exercise, vesting, payout or other term of condition of an Award on the achievement of Performance Goals, (h) unless otherwise provided by the Committee, amend any outstanding Award in any respect, not materially adverse to the Participant, including, without limitation, to (i) accelerate the time or times at which the Award becomes vested, unrestricted or may be exercised (and, in connection with such acceleration, the Committee may provide that any Shares acquired pursuant to such Award shall be restricted Shares, which are subject to vesting, transfer, forfeiture or repayment provisions similar to those in the Participant’s underlying Award), provided, however, that any accelerated vesting is subject to stockholder approval, (ii) accelerate the time or times at which Shares are delivered under the Award (and, without limitation on the Committee’s rights, in connection with such acceleration, the Committee may provide that any shares of Stock delivered pursuant to such Award shall be Restricted Shares, which are subject to vesting, transfer, forfeiture or repayment provisions similar to those in the Participant’s underlying Award), or (iii) waive or amend any goals, restrictions or conditions applicable to such Award, or impose new goals, restrictions and (i) determine at any time whether, to what extent and under what circumstances and method or methods (i) Awards may be (A) settled in cash, Shares, other securities, other Awards or other property (in which event, the Committee may specify what other effects such settlement will have on the Participant’s Award), (B) exercised or (C) canceled, forfeited or suspended, (ii) Shares, other securities, cash, other Awards or other property and other amounts payable with respect to an Award may be deferred either automatically or at the election of the Participant or of the Committee, or (iii) Awards may be settled by the Company or any of its Subsidiaries or any of its or their designees.

6

---

 

No Award may be made under the Plan after the tenth (10^th) anniversary of the Effective Date.

3.3Committee Decisions Final. The act or determination of a majority of the Committee shall be the act or determination of the Committee and any decision reduced to writing and signed by all of the members of the Committee shall be fully effective as if it had been made by a majority at a meeting duly held. The Committee may employ attorneys, consultants, accountants, agents, and other persons, any of whom may be an Employee, and the Committee, the Company, and its officers and Directors shall be entitled to rely upon the advice, opinions, or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions shall be final and binding upon the Participants, the Company, and all other interested persons, including but not limited to the Company, its stockholders, Employees, Participants, and their estates and beneficiaries.

3.4Delegation of Authority. The Board or Committee may from time to time delegate to a committee of one or more members of the Board or one or more officers of the Company the authority to grant or amend Awards or to take other administrative actions pursuant to this Article 3; provided, however, that in no event shall an officer of the Company be delegated the authority to grant Awards to, or amend Awards held by, the following individuals: (a) individuals who are subject to Section 16 of the Exchange Act, or (b) officers of the Company (or Directors) to whom authority to grant or amend Awards has been delegated hereunder; provided, further, that any delegation of administrative authority shall only be permitted to the extent it is permissible under the Company’s Certificate of Incorporation, Bylaws and Applicable Law. Any delegation hereunder shall be subject to the restrictions and limits that the Board or Committee specifies at the time of such delegation or that are otherwise included in the applicable Organizational Documents, and the Board or Committee, as applicable, may at any time rescind the authority so delegated or appoint a new delegatee. At all times, the delegatee appointed under this Section 3.4 shall serve in such capacity at the pleasure of the Board or the Committee, as applicable, and the Board or the Committee may abolish any committee at any time and re-vest in itself any previously delegated authority

3.5Indemnification. To the extent allowable pursuant to applicable law, each member of the Committee or of the Board shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act pursuant to the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her; provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled pursuant to the Company’s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

Article 4

Shares Subject to the Plan

4.1Number of Shares. Subject to adjustment as provided in Sections 4.2 and 4.3, the aggregate number of Shares of Stock which may be issued or transferred pursuant to Awards under the Plan shall be the sum of 500,000 shares as of the Effective Date (the “Share Limit”). Shares of Stock issued pursuant to the Plan may be either authorized but unissued Shares or Shares held by the Company in its treasury.

4.2Share Accounting. Without limiting the discretion of the Committee under this section, the following rules will apply for purposes of the determination of the number of Shares available for grant under the Plan or compliance with the foregoing limits:

(a)If an outstanding Award for any reason expires or is terminated or canceled without having been exercised or settled in full, or if Shares acquired pursuant to an Award subject to forfeiture are forfeited under the terms of the Plan or the relevant Award, the Shares allocable to the terminated portion of such Award or such forfeited Shares shall again be available for issuance under the Plan.

(b)Shares shall not be deemed to have been issued pursuant to the Plan with respect to any portion of an Award that is settled in cash, other than an Option.

(c)In the event that withholding tax liabilities arising from a full-value Award (i.e., an award other than an Option or SAR) or, after the Effective Date, arising from a full-value award under the Prior Plan, are satisfied by the delivery or withholding of shares, the shares so tendered or withheld shall be added to the 2022 Incentive Plan’s reserve.

7

---

 

Notwithstanding anything to the contrary contained herein, shares subject to an Award shall not again be made available for issuance or delivery under the Plan if such shares are (i) shares tendered in payment of an Option; (ii) shares delivered or withheld by the Company to satisfy any tax withholding obligation with respect to an Option or SAR; (iii) shares covered by a stock-settled Stock Appreciation Right that were not issued upon the settlement of the SAR; or (iv) shares purchased on the open market with Option proceeds.

4.3Adjustments in Authorized Plan Shares and Outstanding Awards. In the event of any merger, reorganization, consolidation, recapitalization, separation, split-up, spin-off, liquidation, Share combination, Stock split, Stock dividend, an extraordinary cash distribution on Stock, a corporate separation or other reorganization or liquidation or other change in the corporate or capital structure of the Company affecting the Shares, an adjustment shall be made in a manner consistent with Sections 422 and 424(h)(3) of the Code for Incentive Stock Options and in a manner consistent with Section 409A of the Code for Non-Qualified Stock Options and Stock Appreciation Rights and in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, and/or the number of outstanding Options, Stock Appreciation Rights, Shares of Restricted Stock, and Performance Shares (and Restricted Stock Units, Performance Stock Units and other Awards whose value is based on a number of Shares) constituting outstanding Awards, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights. The Committee shall also adjust any available share reserve accordingly. The Committee may make adjustments in the terms and conditions of, and the criteria included in Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in this Section) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.  Adjustments under this Section 4.3 shall be consistent with Section 409A of the Code and adjustments pursuant to determination of the Committee shall be conclusive and binding on all Participants under the Plan.

4.4Limitation on Number of Shares Granted to Non-Employee Directors. The maximum number of Shares subject to Awards granted during a single fiscal year to any Non-Employee Director, taken together with any cash fees paid during the fiscal year to the Non-Employee Director, in respect of such Director’s service as a member of the Board during such year (including service as a member or chair of any committees of the Board), shall not exceed $500,000 in total value (calculating the value of any such Awards based on the grant date Fair Market Value of such Awards for financial reporting purposes). The independent members of the Board may make exceptions to this limit for a non-executive chair of the Board, provided that the Non-Employee Director receiving such additional compensation may not participate in the decision to award such compensation.

Article 5

Eligibility and Participation

5.1Eligibility and Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all Eligible Persons, those to whom Awards shall be granted and shall determine, in its sole discretion, the nature of, any and all terms permissible by law, and the amount of each Award. In making this determination, the Committee may consider any factors it deems relevant, including without limitation, the office or position held by a Participant or the Participant’s relationship to the Company, the Participant’s degree of responsibility for and contribution to the growth and success of the Company or any Subsidiary or Affiliate, the Participant’s length of service, promotions and potential. No individual shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award. In addition, there is no obligation for uniformity of treatment of Participants or holders or beneficiaries of Awards.  The terms and conditions of Awards and the Committee’s determinations and interpretations with respect thereto need not be the same with respect to each Participant and may be made selectively among Participants, whether or not such Participants are similarly situated.

5.2Foreign Participants. In order to assure the viability of Awards granted to Participants employed in foreign countries, the Committee may provide for such special terms as it may consider necessary or appropriate to accommodate differences in local law, tax policy, or custom. Moreover, the Committee may approve such supplements to, or amendments, restatements, or alternative versions of, the Plan as it may consider necessary or appropriate for such purposes without thereby affecting the terms of the Plan as in effect for any other purpose; provided, however, that no such supplements, amendments, restatements, or alternative versions shall increase the share limitations contained in Section 4.1 of the Plan.

8

---

 

Article 6

Options

6.1Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants in such number, and upon such terms and conditions, and at any time and from time to time as shall be determined by the Committee, in its sole discretion, subject to the limitations set forth in Article 4 and the following terms and conditions:

(a)Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the terms and conditions of the Option, including the Exercise Price, the maximum duration of the Option, the number of Shares to which the Option pertains, the conditions upon which an Option shall become vested and exercisable, and such other provisions as the Committee shall determine which are not inconsistent with the terms of the Plan. The Award Agreement also shall specify whether the Option is intended to be an Incentive Stock Option or a Non-Qualified Stock Option.

(b)Exercise Period. Unless a shorter period is otherwise provided by the Committee at the time of grant, each Option will expire on the tenth (10^th) anniversary date of its grant or on the fifth (5^th) anniversary of its grant date if the Participant is a Ten Percent Owner. Notwithstanding the foregoing, in the event that on the last business day of the term of an Option (x) the exercise of which is prohibited by applicable law or (y) Shares may not be purchased or sold by certain Employees or Directors of the Company due to a “black-out period” of a Company policy or a “lock-up” agreement  undertaken in connection with an issuance of securities by the Company, the Committee may provide that the term of the Option shall be extended but not beyond a period of thirty (30) days following the end of the legal prohibition, black-out period or lock-up agreement and provided further that no extension will be made if the grant price of such Option at the date the initial term would otherwise expire is above the Fair Market Value.

(c)Exercise Price. Unless a greater Exercise Price is determined by the Committee, the Exercise Price for each Option awarded under this Plan shall be equal to one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted. Notwithstanding the foregoing, the Committee may determine the Exercise Price for a substitute Award, provided such Exercise Price does not violate applicable law (including, but not limited to, Section 409A of the Code).

(d)Vesting of Options. A grant of Options shall vest at such times and under such terms and conditions as determined by the Committee including, without limitation, suspension of a Participant’s vesting during all or a portion of a Participant’s leave of absence.

6.2Limitations on Incentive Stock Options. In addition to the general requirements of Article 6, the terms of any Incentive Stock Option (“ISO”) granted pursuant to the Plan must comply with the provisions of this Section 6.2.

(a)ISO Eligibility. ISOs may be granted only to Employees of the Company or of any parent or subsidiary corporation (as permitted under Sections 422 and 424 of the Code). No ISO Award may be made pursuant to this Plan after the tenth (10th) anniversary of the Effective Date.

(b)ISO Individual Dollar Limitation. The aggregate Fair Market Value (determined as of the date the Option is granted) of all Shares with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed one hundred thousand dollars ($100,000.00) or such other limitation as imposed by Section 422(d) of the Code. To the extent that Incentive Stock Options are first exercisable by a Participant in excess of such limitation, the excess shall be considered Non-Qualified Stock Options.

(c)ISO Expiration. An ISO will expire and may not be exercised to any extent by anyone after the first to occur of the following events:

(i)Ten (10) years from the date of grant, unless an earlier time is set in the Award Agreement;

(ii)Three (3) months after the date of the Participant’s Termination of Employment other than on account of Disability or death. Whether a Participant continues to be an employee shall be determined in accordance with Treas. Reg. Section 1.421-1(h)(2); and

(iii)One (1) year after the date of the Participant’s Termination of Employment on account of Disability or death. Upon the Participant’s Disability or death, any ISOs exercisable at the Participant’s Disability or death may be exercised by the Participant’s legal representative or representatives, by the person or persons entitled to do so pursuant to

9

---

 

the Participant’s last will and testament, or, if the Participant fails to make testamentary disposition of such ISO or dies intestate, by the person or persons entitled to receive the ISO pursuant to the applicable laws of descent and distribution.

Any ISO that remains exercisable pursuant to a Participant’s agreement with the Company following Termination of Employment and is unexercised more than one (1) year following Termination of Employment by reason of death or Disability or more than three (3) months following Termination of Employment for any reason other than death or Disability will thereafter be deemed to be a Non-Qualified Stock Option.

(d)Ten Percent Owners. In the case of an ISO granted to a Ten Percent Owner, such ISO shall be granted at an exercise price that is not less than one hundred and ten percent (110%) of Fair Market Value on the date of grant and, unless a shorter period is otherwise provided by the Committee at the time of grant, each ISO will expire on the fifth (5^th) anniversary of its grant date.

(e)Notification of Disposition.  If a Participant disposes of Shares acquired upon exercise of an ISO within two (2) years from the date the Option is granted or within one (1) year after the issuance of such Shares to the Participant, the Participant shall notify the Company of such disposition and provide information regarding the date of disposition, sale price, number of Shares disposed of, and any other information relating thereto that the Company may reasonably request.

(f)Right to Exercise. During a Participant’s lifetime, an Incentive Stock Option may be exercised only by the Participant.

(g)Failure to Meet ISO Requirements. If an Option is intended to be an Incentive Stock Option, and if, for any reason, such Option (or any portion thereof) shall not qualify as an Incentive Stock Option, then, to the extent of such nonqualification, such Option (or portion thereof) shall be regarded as a Non-Qualified Stock Option appropriately granted under the Plan; provided that such Option (or portion thereof) otherwise complies with the Plan’s requirements relating to Non-Qualified Stock Options.

6.3Exercise of Options.

(a)Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant. Exercises of Options may be effected only on days and during the hours the NYSE is open for regular trading. The Company may change or limit the times or days Options may be exercised. If an Option expires on a day or at a time when exercises are not permitted, then the Options may be exercised no later than the immediately preceding date and time that the Options were exercisable.

(b)An Option shall be exercised by providing notice to the designated agent selected by the Company (if no such agent has been designated, then to the Company), in the manner and form determined by the Company, which notice shall be irrevocable, setting forth the exact number of Shares with respect to which the Option is being exercised and including with such notice payment of the Exercise Price, as applicable. When an Option has been transferred, the Company or its designated agent may require appropriate documentation that the person or persons exercising the Option, if other than the Participant, has the right to exercise the Option. No Option may be exercised with respect to a fraction of a Share.

6.4Termination of Employment. Unless otherwise provided by the Committee in the applicable Award Agreement, the following limitations on the exercise of Options shall apply upon Termination of Employment:

(a)Termination by Death or Disability. In the event of the Participant’s Termination of Employment by reason of death or Disability, all outstanding Options granted to such Participant which are vested and exercisable as of the effective date of Termination of Employment by reason of death or Disability may be exercised, if at all, no more than one (1) year from such date of Termination of Employment, unless the Options, by their terms, expire earlier. All unvested Options granted to such Participant shall immediately become forfeited.

(b)Involuntary Termination Without Cause. If a Participant’s Termination of Employment is by involuntary termination without Cause, all Options held by such Participant that are vested and exercisable at the time of the Participant’s Termination of Employment may be exercised by the Participant at any time within a period of ninety (90) days from the date of such Termination of Employment, but in no event beyond the expiration of the stated term of such Options. All Options held by the Participant which are not vested on or before the effective date of Termination of Employment shall

10

---

 

immediately be forfeited to the Company (and the Shares subject to such forfeited Options shall once again become available for issuance under the Plan).

(c)Voluntary Termination. If a Participant’s Termination of Employment is voluntary (other than a voluntary termination described in Section 6.4(d)), all Options held by such Participant that are vested and exercisable at the time of the Participant’s Termination of Employment may be exercised by the Participant at any time within a period of ninety (90) days from the date of such Termination of Employment, but in no event beyond the expiration of the stated terms of such Options. All Options held by the Participant which are not vested on or before the effective date of Termination of Employment shall immediately be forfeited to the Company (and the Shares subject to such forfeited Options shall once again become available for issuance under the Plan).

(d)Termination for Cause. If the Participant’s Termination of Employment (i) is by the Company for Cause or (ii) is a voluntary Termination (as provided in Subsection (c) above) after the occurrence of an event that would be grounds for Termination of Employment for Cause, all outstanding Options held by the Participant shall immediately be forfeited to the Company and no additional exercise period shall be allowed, regardless of the vested status of the Options (and the Shares subject to such forfeited Options shall once again become available for issuance under the Plan).

(e)Other Terms and Conditions. A Participant holding an Option is not eligible to receive dividends or Dividend Equivalents. Notwithstanding the foregoing, the Committee may, in its sole discretion, establish different, or waive, terms and conditions pertaining to the effect of Termination of Employment on Options, whether or not the Options are outstanding, but no such modification shall be materially adverse to the Participant.

6.5Payment. The Committee shall determine the methods by which payments by any Participant with respect to any Awards granted under the Plan may be paid and the form of payment. Unless otherwise determined by the Committee, the Exercise Price shall be paid in full at the time of exercise. No Shares shall be issued or transferred until full payment has been received or the next business day thereafter, as determined by the Company. The Committee may, from time to time, determine or modify the method or methods of exercising Options or the manner in which the Exercise Price is to be paid.  Unless otherwise provided by the Committee in full or in part, to the extent permitted by Applicable Law, payment may be made by any of the following:

(a)cash or certified or bank check;

(b)delivery of Shares owned by the Participant duly endorsed for transfer to the Company, with a Fair Market Value of such Shares delivered on the date of delivery equal to the Exercise Price (or portion thereof) due for the number of Shares being acquired;

(c)if the Company has designated a stockbroker to act as the Company’s agent to process Option exercises, an Option may be exercised by issuing an exercise notice together with instructions to such stockbroker irrevocably instructing the stockbroker: (i) to immediately sell (which shall include an exercise notice that becomes effective upon execution of a sale order) a sufficient portion of the Shares to be received from the Option exercise to pay the Exercise Price of the Options being exercised and the required tax withholding, and (ii) to deliver on the settlement date the portion of the proceeds of the sale equal to the Exercise Price and tax withholding to the Company. In the event the stockbroker sells any Shares on behalf of a Participant, the stockbroker shall be acting solely as the agent of the Participant, and the Company disclaims any responsibility for the actions of the stockbroker in making any such sales. However, if the Participant is an Insider, then the instruction to the stock broker to sell in the preceding sentence is intended to comply with the requirements of Rule 10b5-1(c)(1)(i)(B) of the Exchange Act to the extent permitted by law. No Shares shall be issued until the settlement date and until the proceeds (equal to the Exercise Price and tax withholding) are paid to the Company;

(d)at any time, the Committee may, in addition to or in lieu of the foregoing, provide that an Option may be “stock settled,” which shall mean upon exercise of an Option, the Company may fully satisfy its obligation under the Option by delivering that number of shares of Stock found by taking the difference between (i) the Fair Market Value of the Stock on the exercise date, multiplied by the number of Options being exercised and (ii) the total Exercise Price of the Options being exercised, and dividing such difference by the Fair Market Value of the Stock on the exercise date; or

(e)any combination of the foregoing methods.

Notwithstanding any other provision of the Plan to the contrary, no Participant who is a Director or an “executive officer” of the Company shall be permitted to pay the Exercise Price of an Option in any method which would violate Section 13(h) of the Exchange Act.

11

---

 

 

Stock Appreciation Rights

7.1Grant of SARs. Any Participant selected by the Committee may be granted one or more SARs. SARs may be granted alone or in tandem with Options. Each SAR shall be evidenced by an Award Agreement that shall specify the exercise price, the term of the SAR, and such other provisions as the Committee shall determine. With respect to SARs granted in tandem with Options, the exercise of either such Options or such SARs shall result in the simultaneous cancellation of the same number of tandem SARs or Options, as the case may be.

7.2Exercise Price. The exercise price per Share covered by a SAR granted pursuant to the Plan shall be equal to or greater than Fair Market Value on the date the SAR was granted.

7.3Term. The term of each SAR shall be determined by the Committee in its sole discretion, but in no event shall the term exceed ten (10) years from the date of grant. Notwithstanding the foregoing, in the event that on the last business day of the term of a SAR (x) the exercise of which is prohibited by applicable law or (y) Shares may not be purchased or sold by certain Employees or Directors of the Company due to a “black-out period” of a Company policy or a “lock-up” agreement  undertaken in connection with an issuance of securities by the Company, the Committee may provide that the term of the SAR shall be extended but not beyond a period of thirty (30) days following the end of the legal prohibition, black-out period or lock-up agreement and provided further that no extension will be made if the grant price of such SAR at the date the initial term would otherwise expire is above the Fair Market Value.

7.4Payment. SARs may be settled in the form of cash, shares of Stock or a combination of cash and shares of Stock, as determined by the Committee.

7.5Other Provisions. Except as the Committee may deem inappropriate or inapplicable in the circumstances, SARs shall be subject to terms and conditions substantially similar to those applicable to Non-Qualified Options as set forth in Article 6, including, but not limited to, the ineligibility to receive dividends or Dividend Equivalents.

Article 8

Restricted Stock Awards

8.1Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant shares of Restricted Stock to Eligible Persons in such amounts and upon such terms and conditions as the Committee shall determine. In addition to any other terms and conditions imposed by the Committee, vesting of Restricted Stock may be conditioned upon the achievement of Performance Goals.

8.2Restricted Stock Agreement. The Committee may require, as a condition to receiving a Restricted Stock Award, that the Participant enter into a Restricted Stock Award Agreement, setting forth the terms and conditions of the Award. In lieu of a Restricted Stock Award Agreement, the Committee may provide the terms and conditions of an Award in a notice to the Participant of the Award, on the Stock certificate representing the Restricted Stock, in the resolution approving the Award, or in such other manner as it deems appropriate. If certificates representing the Restricted Stock are registered in the name of the Participant, any certificates so issued shall be printed with an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award as determined or authorized in the sole discretion of the Committee.  Shares recorded in book-entry form shall be recorded with a notation referring to the terms, conditions, and restrictions applicable to such Award as determined or authorized in the sole discretion of the Committee. The Committee may require that the stock certificates or book-entry registrations evidencing shares of Restricted Stock be held in custody by a designated escrow agent (which may but need not be the Company) until the restrictions thereon shall have lapsed, and that the Participant deliver a stock power, endorsed in blank, relating to the Stock covered by such Award.

8.3Restrictions. The Restricted Stock shall be subject to such vesting terms, including the achievement of Performance Goals, as may be determined by the Committee. Unless otherwise provided by the Committee, to the extent Restricted Stock is subject to any condition to vesting, if such condition or conditions are not satisfied by the time the period for achieving such condition has expired, such Restricted Stock shall be forfeited. The Committee may impose such other conditions and/or restrictions on any shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including but not limited to a requirement that Participants pay a stipulated purchase price for each share of Restricted Stock and/or restrictions under Applicable Law. The Committee may also grant Restricted Stock without any terms or conditions in the form of vested Stock Awards.

12

---

 

8.4Removal of Restrictions. Except as otherwise provided in this Article 8 or otherwise provided in the grant thereof, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after completion of all conditions to vesting, if any. However, the Committee, in its sole discretion, shall have the right to waive all or part of the restrictions and conditions with regard to all or part of the shares held by any Participant at any time.

8.5Voting Rights, Dividends and Other Distributions. Participants holding shares of Restricted Stock granted hereunder may exercise full voting rights and, subject to the provisions of this Section 8.5, may receive all dividends and distributions paid with respect to such Shares. If any such dividends or distributions are paid in Shares, the Shares shall automatically be subject to the same restrictions and conditions as the Restricted Stock with respect to which they were paid. In addition, with respect to a share of Restricted Stock, dividends shall only be paid out to the extent that the Share of Restricted Stock vests. Any cash dividends and stock dividends with respect to the Restricted Stock shall be withheld by the Company for the Participant’s account, and interest may be credited on the amount of the cash dividends withheld at a rate and subject to such terms as determined by the Committee. The cash dividends or stock dividends so withheld by the Committee and attributable to any particular share of Restricted Stock (and earnings thereon, if applicable) shall be distributed to the Participant in cash or, at the discretion of the Committee, in shares of Stock having a Fair Market Value equal to the amount of such dividends, if applicable, upon the release of restrictions on such share and, if such share is forfeited, the Participant shall have no right to such dividends.

8.6Termination of Employment Due to Death or Disability. In the event of the Participant’s Termination of Employment by reason of death or Disability, unless otherwise determined by the Committee, all restrictions imposed on outstanding Shares of Restricted Stock held by the Participant shall immediately lapse and the Restricted Stock shall immediately become fully vested as of the date of Termination of Employment.

8.7Termination of Employment for Other Reasons. Unless otherwise provided by the Committee, in the event of the Participant’s Termination of Employment for any reason other than those specifically set forth in Section 8.6 herein, subject to Section 10.2, all shares of Restricted Stock held by the Participant which are not vested as of the effective date of Termination of Employment shall immediately be forfeited and returned to the Company.

8.8Section 83(b) Election. The Committee may provide in an Award Agreement that the Award of Restricted Stock is conditioned upon the Participant making or refraining from making an election with respect to the Award under Section 83(b) of the Code. If a Participant makes an election pursuant to Section 83(b) of the Code concerning a Restricted Stock Award, the Participant shall be required to file a copy of such election with the Company within thirty (30) days following the date of grant.

8.9Restricted Stock Units. In lieu of or in addition to Restricted Stock, the Committee may grant Restricted Stock Units under such terms and conditions as shall be determined by the Committee in accordance with Section 3.2. Restricted Stock Units shall be subject to the same terms and conditions under this Plan as Restricted Stock except as otherwise provided in this Plan or as otherwise provided by the Committee. Except as otherwise provided by the Committee, the award shall be settled and paid out promptly upon vesting (to the extent permitted by Section 409A of the Code), and the Participant holding such Restricted Stock Units shall receive, as determined by the Committee, Shares (or cash equal to the Fair Market Value of the number of Shares as of the date the Award becomes payable) equal to the number of such Restricted Stock Units. Restricted Stock Units shall not be transferable, shall have no voting rights, and, unless otherwise determined by the Committee, shall not receive dividends or Dividend Equivalents (which in any event shall only be paid out to the extent that the Restricted Stock Units vest). Upon a Participant’s Termination of Employment due to death or Disability, the Committee will determine whether there should be any acceleration of vesting.

Article 9

Other Types of Awards

9.1Performance Share Awards. Any Participant selected by the Committee may be granted one or more Performance Share awards which shall be denominated in a number of shares of Stock and which may be linked to any one or more of the Performance Goals or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular Participant.

13

---

 

9.2Performance Stock Units. Any Participant selected by the Committee may be granted one or more Performance Stock Unit awards which shall be denominated in units of value including dollar value of shares of Stock and which may be linked to any one or more of the Performance Goals or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular Participant.

9.3Dividend Equivalents.  Any Participant selected by the Committee may be granted Dividend Equivalents based on the dividends declared on the Shares that are subject to any Award, to be credited as of dividend payment dates, during the period between the date the Award is granted and the date the Award is exercised, vests or expires, as determined by the Committee. Such Dividend Equivalents shall be converted to cash or additional shares of Stock by such formula and at such time and subject to such limitations as may be determined by the Committee, in a matter consistent with the rules of Section 409A of the Code; provided that, to the extent Shares subject to an Award are subject to vesting conditions, any Dividend Equivalents relating to such Shares shall be subject to the same vesting conditions.

9.4Deferred Stock. Any Participant selected by the Committee may be granted an award of Deferred Stock in the manner determined from time to time by the Committee. The number of shares of Deferred Stock shall be determined by the Committee and may be linked to the Performance Goals or other specific performance criteria determined to be appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. Stock underlying a Deferred Stock Award will not be issued until the Deferred Stock Award has vested, pursuant to a vesting schedule or performance criteria set by the Committee. Unless otherwise provided by the Committee, a Participant awarded Deferred Stock shall have no rights as a Company stockholder with respect to such Deferred Stock until such time as the Deferred Stock Award has vested and the Stock underlying the Deferred Stock Award has been issued.

9.5Other Stock-Based Awards. Any Participant selected by the Committee may be granted one or more Awards that provide Participants with shares of Stock or the right to purchase shares of Stock or that have a value derived from the value of, or an exercise or conversion privilege at a price related to, or that are otherwise payable in shares of Stock and which may be linked to any one or more of the Performance Goals or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of Award) the contributions, responsibilities and other compensation of the particular Participant.

9.6Performance Bonus Awards. Any Participant selected by the Committee may be granted one or more Awards in the form of a cash bonus (a “Performance Bonus Award”) payable upon the attainment of Performance Goals that are established by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee.

9.7Term. Except as otherwise provided herein, the term of any Award of Performance Shares, Performance Stock Units, Dividend Equivalents, Deferred Stock, Other Stock-Based Award and Performance Bonus Award shall be set by the Committee in its discretion.

9.8Exercise or Purchase Price. The Committee may establish the exercise or purchase price, if any, of any Award of Performance Shares, Performance Stock Units, Deferred Stock, Other Stock-Based Award and Performance Bonus Award; provided, however, that such price shall not be less than the Fair Market Value of a share of Stock on the date of grant, unless otherwise permitted by Applicable Law.

9.9Exercise Upon Termination of Employment or Service. An Award of Performance Shares, Performance Stock Units, Deferred Stock, Other Stock-Based Awards and Performance Bonus Awards shall only be exercisable or payable while the Participant is an Employee, Consultant or Non-Employee Director, as applicable; provided, however, that the Committee in its sole and absolute discretion may provide that an Award of Performance Shares, Performance Stock Units, Deferred Stock, Stock Appreciation Rights, Other Stock-Based Award and Performance Bonus Award may be exercised or paid subsequent to a Termination of Employment without Cause. In the event of the Termination of Employment of a Participant by the Company for Cause, all Awards under this Article 9 shall be forfeited by the Participant to the Company.

9.10Form of Payment. Payments with respect to any Awards granted under this Article 9 shall be made in cash, in Stock or a combination of both, as determined by the Committee.

9.11Award Agreement. All Awards under this Article 9 shall be subject to such additional terms and conditions as determined by the Committee and shall be evidenced by a written Award Agreement.

14

---

 

Article 10

Change in Control

10.1Vesting Upon Change in Control. For the avoidance of doubt, the Committee may not accelerate the vesting and exercisability (as applicable) of any outstanding Awards, in whole or in part, solely upon the occurrence of a Change in Control except as provided in this Section 10.1. In the event of a Change in Control after the date of the adoption of the Plan, then:

(a)to the extent an outstanding Award subject solely to time-based vesting is not assumed or replaced by a comparable Award referencing shares of the capital stock of the successor corporation or its “parent corporation” (as defined in Section 424(e) of the Code) or “subsidiary corporation” (as defined in Section 424(f) of the Code) which is publicly traded on a national stock exchange or quotation system, as determined by the Committee in its sole discretion, with appropriate adjustments as to the number and kinds of shares and the exercise prices, if applicable, then any outstanding Award subject solely to time-based vesting then held by Participants that is unexercisable, unvested or still subject to restrictions or forfeiture shall, in each case as specified by the Committee in the applicable Award Agreement or otherwise, be deemed exercisable or otherwise vested, as the case may be, as of immediately prior to such Change in Control;

(b)any stock-denominated performance-based Awards outstanding as of the date such Change in Control is determined to have occurred shall be converted into, as applicable, time-based restricted stock of the successor corporation or its “parent corporation” (as defined in Section 424(e) of the Code) or “subsidiary corporation” (as defined in Section 424(f) of the Code) or time-based restricted stock units based on the capital stock of the successor corporation or its “parent corporation” (as defined in Section 424(e) of the Code) or “subsidiary corporation” (as defined in Section 424(f) of the Code) and, if, during the 12-month period following the date of such Change in Control, the Participant’s employment is terminated by such successor (or an affiliate thereof) without Cause or by the Participant for Good Reason, such Awards, to the extent then outstanding, shall fully vest. With respect to performance-based Awards that are outstanding as of the date of such Change in Control and are not converted to a time-based Award, any deferral or other restriction shall lapse and such Awards shall be settled in cash as promptly as is practicable (unless otherwise required by Section 409A of the Code and the applicable terms of the Awards). In either case, unless otherwise determined by the Committee in an Award Agreement or otherwise, the value of the performance-based Awards as of the date of the Change in Control shall be determined assuming target performance has been achieved, except that the value shall be determined based on actual performance as of such date if (i) more than half of the performance period has elapsed as of such date and (ii) actual performance is determinable as of such date; and

(c)Each outstanding Award that is assumed in connection with a Change in Control, or is otherwise to continue in effect subsequent to the Change in Control, will be appropriately adjusted, immediately after the Change in Control, as to the number and class of securities and other relevant terms in accordance with Section 4.3.

10.2Termination of Employment Upon Change in Control. Notwithstanding any other provision of the Plan to the contrary, and except as may otherwise be provided in any applicable Award Agreement or other written agreement entered into between the Company or Affiliate and a Participant, upon (i) a Participant’s involuntary Termination of Employment without Cause on or within one (1) year following a Change in Control, or (ii) a Participant’s Termination of Employment for Good Reason (including the Termination of Employment of the Participant if he or she is employed by an Affiliate at the time the Company sells or otherwise divests itself of such Affiliate), all outstanding Awards shall immediately become fully vested and exercisable; provided that Restricted Stock Units shall be settled in accordance with the terms of the grant without regard to the Change in Control unless the Change in Control constitutes a “change in control event” within the meaning of Section 409A of the Code and such Termination of Employment occurs within one (1) year following such Change in Control, in which case the Restricted Stock Units shall be settled and paid out with such Termination of Employment.

10.3Cancellation and Termination of Awards.  The Committee may, in connection with any merger, consolidation, share exchange or other transaction entered into by the Company in good faith, determine that any outstanding Awards granted under the Plan, whether or not vested, will be canceled and terminated and that in connection with such cancellation and termination the holder of such Award may receive for each Share subject to such Award a cash payment (or the delivery of shares of stock, other securities or a combination of cash, stock and securities equivalent to such cash payment) equal to the difference, if any, between the amount determined by the Committee to be the Fair Market Value of the Stock and the purchase price per Share (if any) under the Award multiplied by the number of Shares subject to such Award; provided that if such product is zero or less or to the extent that the Award is not then exercisable, the Award will be canceled and terminated without payment therefor.

15

---

 

Article 11

Amendment, Modification, and Termination

11.1Amendment, Modification, and Termination of Plan. At any time and from time to time, the Board may amend, modify, alter, suspend, discontinue or terminate the Plan, in whole or in part, without stockholder approval; provided, however, that (a) to the extent necessary and desirable to comply with any Applicable Law, regulation, or stock exchange rule, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required, and (b) stockholder approval is required for any amendment to the Plan that (i) increases the number of shares available under the Plan or the number of shares available for issuance as ISOs, or (ii) permits the Committee to grant Options with an Exercise Price that is below Fair Market Value on the date of grant (except as otherwise  provided in Section 6.1), or (iii) permits the Committee to extend the exercise period for an Option beyond ten (10) years from the date of grant (except as otherwise provided in Section 6.1), or (iv) results in a material increase in benefits or a change in eligibility requirements, or (v) changes the granting corporation or (vi) changes the type of stock.

11.2Amendment of Awards. Subject to Section 4.3, at any time and from time to time, the Committee may amend the terms of any one or more outstanding Awards, provided that the Award as amended is consistent with the terms of the Plan or if necessary or advisable for the purpose of conforming the Plan or an Award Agreement to any present or future law relating to plans of this or similar nature (including, without limitation, Section 409A), and to the administrative regulations and rulings promulgated thereunder.

11.3Awards Previously Granted. No termination, amendment, or modification of the Plan or any Award shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award; provided, however, that any such modification made for the purpose of complying with Section 409A of the Code may be made by the Company without the consent of any Participant.

11.4Repricing and Backdating Prohibited. Notwithstanding anything in this Plan to the contrary, except as provided under Section 4.3 and Section 11.2, neither the Committee nor any other person may (i) amend the terms of outstanding Options or SARs to reduce the exercise or grant price of such outstanding Options or SARs; (ii) cancel outstanding Options or SARs in exchange for Options or SARs with an exercise or grant price that is less than the exercise price of the original Options or SARs; or (iii) cancel outstanding Options or SARs with an exercise or grant price above the current Share price in exchange for cash or other securities. In addition, the Committee may not make a grant of an Option or SAR with a grant date that is effective prior to the date the Committee takes action to approve such Award.

Article 12

Withholding

12.1Tax Withholding. Unless otherwise provided by the Committee, the Company shall deduct or withhold any amount needed to satisfy any foreign, federal, state, or local tax (including but not limited to the Participant’s employment tax obligations) required by law to be withheld with respect to any taxable event arising or as a result of this Plan (“Withholding Taxes”).

12.2Share Withholding. Unless otherwise provided by the Committee, upon the exercise of Options, the lapse of restrictions on Restricted Stock, the vesting of Restricted Stock Units the distribution of Performance Shares in the form of Stock, or any other taxable event hereunder involving the transfer of Stock to a Participant, the Company shall withhold Stock equal in value, using the Fair Market Value on the date determined by the Company to be used to value the Stock for tax purposes, to the Withholding Taxes applicable to such transaction.

Unless otherwise determined by the Committee, when the method of payment for the Exercise Price is from the sale by a stockbroker pursuant to Section 6.5(c), herein, of the Stock acquired through the Option exercise, then the tax withholding shall be satisfied out of the proceeds. For administrative purposes in determining the amount of taxes due, the sale price of such Stock shall be deemed to be the Fair Market Value of the Stock.

If permitted by the Committee, prior to the end of any Performance Period a Participant may elect to have a greater amount of Stock withheld from the distribution of Performance Shares to pay withholding taxes; provided, however, the Committee may prohibit or limit any individual election or all such elections at any time.

16

---

 

Alternatively, or in combination with the foregoing, the Committee may require Withholding Taxes to be paid in cash by the Participant or by the sale of a portion of the Stock being distributed in connection with an Award, or by a combination thereof.

The withholding of taxes is intended to comply with the requirements of Rule 10b5-1(c)(1)(i)(B) of the Exchange Act to the extent permitted by law.

Article 13

General Provisions Applicable to Awards

13.1Minimum Vesting Requirement. Notwithstanding any other provision of the Plan to the contrary, Awards granted under the Plan (other than cash-based awards) shall vest no earlier than the first anniversary of the date on which the Award is granted; provided, that the following Awards shall not be subject to the foregoing minimum vesting requirement: any (i) substitute Awards granted in connection with awards that are assumed, converted or substituted pursuant to a merger, acquisition or similar transaction entered into by the Company or any of its Subsidiaries, (ii) Shares delivered in lieu of fully vested cash obligations; and, provided, further, that the foregoing restriction does not apply to the Committee’s discretion to provide for accelerated exercisability or vesting of any Award, including in cases of retirement, death, Disability or a Change in Control, in the terms of the Award Agreement or otherwise.

13.2Form of Payment. Subject to the provisions of this Plan, the Award Agreement and any Applicable Law, payments or transfers to be made by the Company or any Affiliate on the grant, exercise, or settlement of any Award may be made in such form as determined by the Committee including, without limitation, cash, Stock, other Awards, other property, or any combination thereof, and may be made in a single payment or transfer, in installments, or any combination thereof, in each case determined by rules adopted by the Committee.

13.3Treatment of Dividends and Dividend Equivalents on Unvested Awards.  Notwithstanding any other provision of the Plan to the contrary, with respect to any Award that provides for or includes a right to dividends or Dividend Equivalents, if dividends are declared during the period that an equity Award is outstanding, such dividends (or Dividend Equivalents) shall either (a) not be paid or credited with respect to such Award or (b) be accumulated but remain subject to vesting requirement(s) to the same extent as the applicable Award and shall only be paid at the time or times such vesting requirement(s) are satisfied.

13.4Limits on Transfer.

(a)Except as otherwise provided in Section 13.4(b),

(i)no Award may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or the laws of descent and distribution or pursuant to a domestic relations order, unless and until such Award has been exercised, or the Shares underlying such Award have been issues, and all restrictions applicable to such Shares have lapsed;

(ii)no Award or interest or right therein shall be liable for or otherwise subject to the debts, contracts or engagements of the Participant or the Participant’s successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, hypothecation, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy) unless and until such Award has been exercised, or the Shares underlying such Award have been issued, and all restrictions applicable to such Shares have lapsed, and any attempted disposition of an Award prior to satisfaction of these conditions shall be null and void and of no effect, except to the extent that such disposition is permitted by Section 13.4(a)(i); and

(iii)during a Participant’s lifetime, only the Participant or the Participant’s guardian or legal representative may exercise an Award (or any portion thereof) granted to him or her under the Plan, unless it has been disposed of pursuant to a domestic relations order. After a Participant’s death, any exercisable portion of an Award may, prior to the time when such portion becomes unexercisable under the Plan or the applicable Award Agreement, be exercised by such Participant’s personal representative or by any person empowered to do so under the deceased Participant’s will or under the then applicable laws of descent and distribution.

17

---

 

(b)Notwithstanding Section 13.4(a), the Committee, in its sole discretion, may determine to permit a Participant or a Permitted Transferee of such Participant to transfer an Award other than an Incentive Stock Option (unless such Incentive Stock Option is intended to become a Non-Qualified Stock Option) to any one or more Permitted Transferees of such Participant without consideration, subject to the following terms and conditions: (i) an Award transferred to a Permitted Transferee shall not be assignable or transferable by the Permitted Transferee other than (A) to another Permitted Transferee of the applicable Participant or (B) by will or the laws of descent and distribution or, subject to the consent of the Committee, pursuant to a domestic relations order; (ii) an Award transferred to a Permitted Transferee shall continue to be subject to all the terms and conditions of the Award as applicable to the original Participant (other than the ability to further transfer the Award to any person other than another Permitted Transferee of the applicable Participant); and (iii) the Participant (or transferring Permitted Transferee) and the receiving Permitted Transferee shall execute any and all documents requested by the Committee, including, without limitation documents to (A) confirm the status of the transferee as a Permitted Transferee, (B) satisfy any requirements for an exemption for the transfer under Applicable Law and (C) evidence the transfer. In addition, and further notwithstanding Section 13.4(a), hereof, the Committee, in its sole discretion, may determine to permit a Participant to transfer Incentive Stock Options to a trust that constitutes a Permitted Transferee if, under Section 671 of the Code and other Applicable Law, the Participant is considered the sole beneficial owner of the Incentive Stock Option while it is held in the trust.

13.5Beneficiaries. Notwithstanding Section 13.4, if provided in the applicable Award Agreement, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant’s death. A beneficiary, legal guardian, legal representative, or other person claiming any rights pursuant to the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If the Participant is married and resides in a community property state, a designation of a person other than the Participant’s spouse as his or her beneficiary with respect to more than fifty percent (50%) of the Participant’s interest in the Award shall not be effective without the prior written consent of the Participant’s spouse. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled thereto pursuant to the Participant’s will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Committee.

13.6Forfeiture Events/Representations.  The Committee may specify in an Award Agreement at the time of the Award that the Participant’s rights, payments and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events shall include, but shall not be limited to, termination of service for Cause, violation of material Company policies, breach of noncompetition, confidentiality or other restrictive covenants that may apply to the Participant, or other conduct by the Participant that is detrimental to the business or reputation of the Company. The Committee may also specify in an Award Agreement that the Participant’s rights, payments and benefits with respect to an Award shall be conditioned upon the Participant making a representation regarding compliance with noncompetition, confidentiality or other restrictive covenants that may apply to the Participant and providing that the Participant’s rights, payments and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture or recoupment on account of a breach of such representation. In addition and without limitation of the foregoing, any amounts paid hereunder shall be subject to recoupment in accordance with The Dodd–Frank Wall Street Reform and Consumer Protection Act and any implementing regulations thereunder, any “clawback” policy adopted by the Company or as is otherwise required by applicable law or stock exchange listing condition.

Awards under the Plan shall be subject to the Company’s clawback policy, as in effect from time to time. If there shall be no such clawback policy in effect, (1) awards under the Plan and any Shares issued pursuant to Awards under the Plan (and any gains thereon) shall be subject to recovery or “clawback” by the Company if and to the extent that the vesting of such Awards was determined or calculated based on materially inaccurate financial statements or any other material inaccurate performance metric criteria; or (2) if the Company or its Subsidiaries terminate a Participant’s service relationship due to the Participant’s gross negligence or willful misconduct, or determine there are grounds for such a termination (whether or not such actions also constitute “cause” under an Award Agreement), any Awards under the Plan, whether or not vested, as well as any shares of Stock issued pursuant to Awards under this Plan (and any gains thereon) shall be subject to forfeiture, recovery and “clawback.”  Notwithstanding anything to the contrary contained herein, if a Participant has engaged in any detrimental activity (including noncompliance with restrictive covenants), as determined by the Committee, the Committee may, in its sole discretion, provide for cancellation of any or all of such Participant’s outstanding Awards and/or forfeiture by the Participant of any gain realized in respect of Awards, and repayment of any such gain promptly to the Company.

 

18

---

 

 

13.7No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award.  The Committee shall determine whether cash, Awards, or other property shall be issued or paid in lieu of fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated.

13.8Reservation of Stock. The Company shall at all times during the term of the Plan and any outstanding Awards granted hereunder reserve or otherwise keep available such number of Shares of Stock as will be sufficient to satisfy the requirements of the Plan (if then in effect) and the Awards and shall pay all fees and expenses necessarily incurred by the Company in connection therewith.

13.9Reimbursement of Company for Unearned or Ill-gotten Gains. Unless otherwise specifically provided in an Award Agreement, and to the extent permitted by Applicable Law, if the Company is required to prepare an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the securities laws, the Committee may, without obtaining the approval or consent of the Company’s shareholders or of any Participant, require that any Participant who personally engaged in one of more acts of fraud or misconduct that have caused or partially caused the need for such restatement or any current or former chief executive officer, chief financial officer, or executive officer, regardless of their conduct, to reimburse the Company in a manner consistent with Section 409A of the Code, if the Award constitutes “Non-Qualified Deferred Compensation,” for all or any portion of any Awards granted or settled under this Plan (with each such case being a “Reimbursement”), or the Committee may require the termination or rescission of, or the recapture associated with, any Award, in excess of the amount the Participant would have received under the accounting restatement.

13.10Delay in Payment. To the extent required in order to avoid the imposition of any interest and/or additional tax under Section 409A(a)(1)(B) of the Code, any amount that is considered deferred compensation under the Plan or Award Agreement and that is required to be postponed pursuant to Section 409A of the Code, following the a Participant’s Termination of Employment shall be delayed for six (6) months if a Participant is deemed to be a “specified employee” as defined in Section 409A(a)(2)(i)(B) of the Code; provided that, if the Participant dies during the postponement period prior to the payment of the postponed amount, the amounts withheld on account of Section 409A of the Code shall be paid to the executor or administrator of the decedent’s estate within 60 days following the date of his death. A “Specified Employee” means any Participant who is a “key employee” (as defined in Section 416(i) of the Code without regard to paragraph (5) thereof), as determined by the Company in accordance with its uniform policy with respect to all arrangements subject to Section 409A of the Code, based upon the twelve (12) month period ending on each December 31st (the “Identification Period”). All Participants who are determined to be key employees under Section 416(i) of the Code (without regard to paragraph (5) thereof) during the identification period shall be treated as Specified Employees for purposes of the Plan during the twelve (12) month period that begins on the first day of the 4th month following the close of such identification period.

Article 14

Successors

All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

 

Miscellaneous Provisions

15.1Substitute Awards in Corporate Transactions. Nothing contained in the Plan shall be construed to limit the right of the Committee to grant Awards under the Plan in connection with the acquisition, whether by purchase, merger, consolidation or other corporate transaction, of the business or assets of any corporation or other entity. Without limiting the foregoing, the Committee may grant Awards under the Plan to an employee or director of another corporation who becomes an Eligible Person by reason of any such corporate transaction in substitution for awards previously granted by such corporation or entity to such person. The terms and conditions of the substitute Awards may vary from the terms and conditions that would otherwise be required by the Plan solely to the extent the Committee deems necessary for such purpose. Any shares of Stock subject to these substitute Awards shall not be counted against the share reserve set forth in Article 4 of the Plan.

15.2409A Compliance. It is intended that all Awards issued under the Plan be in a form and administered in a manner that will comply with the requirements of Section 409A of the Code, or the requirements of an exception to Section 409A of the Code, and the Award Agreement and this Plan will be construed and administered in a manner that is consistent

19

---

 

with and gives effect to such intent. The Committee is authorized to adopt rules or regulations deemed necessary or appropriate to qualify for an exception from or to comply with the requirements of Section 409A of the Code. With respect to an Award that constitutes a deferral of compensation subject to Section 409A of the Code: (a) if any amount is payable under such Award upon a termination of service, a termination of service will be treated as having occurred only at such time the Participant has experienced a “separation from service” as such term is defined for purposes of Section 409A of the Code; (b) if any amount is payable under such Award upon a disability, a disability will be treated as having occurred only at such time the Participant has experienced a “disability” as such term is defined for purposes of Section 409A of the Code; (c) if any amount is payable under such Award on account of the occurrence of a Change in Control, a Change in Control will be treated as having occurred only at such time a “change in the ownership or effective control of the corporation or in the ownership of a substantial portion of the assets of the corporation” has occurred as such terms are defined for purposes of Section 409A of the Code, (d) if any amount becomes payable under such Award on account of a Participant’s separation from service at such time as the Participant is a “specified employee” within the meaning of Section 409A of the Code, then no payment shall be made, except as permitted under Section 409A of the Code, prior to the first business day after the earlier of (i) the date that is six months after the date of the Participant’s separation from service or (ii) the Participant’s death, (e) any right to receive any installment payments under this Plan shall be treated as a right to receive a series of separate payments and, accordingly, each installment payment hereunder shall at all times be considered a separate and distinct payment, and (f) no amendment to or payment under such Award will be made except and only to the extent permitted under Section 409A of the Code.

Notwithstanding the foregoing, the tax treatment of the benefits provided under the Plan or any Award Agreement is not warranted or guaranteed, and in no event shall the Company be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Participant on account of non-compliance with Section 409A of the Code.

15.3Section 16(b) of the Exchange Act. All elections and transactions under the Plan by persons subject to Section 16 of the Exchange Act involving shares of Stock are intended to comply with any applicable exemptive condition under Rule 16b‑3. The Committee may, in its sole discretion, establish and adopt written administrative guidelines, designed to facilitate compliance with Section 16(b) of the Exchange Act, as it may deem necessary or proper for the administration and operation of the Plan and the transaction of business thereunder.

15.4Unfunded Status of the Plan. The Plan is intended to constitute an “unfunded” plan for incentive compensation, and the Plan is not intended to constitute a plan subject to the provisions of ERISA.  With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company.  In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments with respect to Options, Stock Appreciation Rights and other Awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan.

15.5Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor the submission of the Plan to the stockholders of the Company shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including without limitation, the granting of stock options and restricted stock other than under the Plan, and such arrangements may be either applicable generally or only in specific cases.

15.6Investment Representations. The Company shall be under no obligation to issue any shares covered by any Award unless the shares to be issued pursuant to Awards granted under the Plan have been effectively registered under the Securities Act of 1933, as amended, or the Participant shall have made such written representations to the Company (upon which the Company believes it may reasonably rely) as the Company may deem necessary or appropriate for purposes of confirming that the issuance of such shares will be exempt from the registration requirements of that Act and any applicable state securities laws and otherwise in compliance with all applicable laws, rules and regulations, including but not limited to that the Participant is acquiring the shares for his or her own account for the purpose of investment and not with a view to, or for sale in connection with, the distribution of any such shares.

15.7Registration. If the Company shall deem it necessary or desirable to register under the Securities Act of 1933, as amended or other applicable statutes any Shares of Stock issued or to be issued pursuant to Awards granted under the Plan, or to qualify any such Shares of Stock for exemption from the Securities Act of 1933, as amended or other applicable statutes, then the Company shall take such action at its own expense.  The Company may require from each recipient of an Award, or each holder of Shares of Stock acquired pursuant to the Plan, such information in writing for use in any registration statement, prospectus, preliminary prospectus or offering circular as is reasonably necessary for that purpose and may require reasonable indemnity to the Company and its officers and directors from that holder against all losses, claims, damage and liabilities arising from use of the information so furnished and caused by any untrue statement of any material fact therein or caused by the omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in

20

---

 

the light of the circumstances under which they were made.  In addition, the Company may require of any such person that he or she agree that, without the prior written consent of the Company or the managing underwriter in any public offering of Shares of Stock, he or she will not sell, make any short sale of, loan, grant any option for the purchase of, pledge or otherwise encumber, or otherwise dispose of, any shares of Stock during the 180 day period commencing on the effective date of the registration statement relating to the underwritten public offering of securities.  Without limiting the generality of the foregoing provisions of this Section 15.7, if in connection with any underwritten public offering of securities of the Company the managing underwriter of such offering requires that the Company’s directors and officers enter into a lock-up agreement containing provisions that are more restrictive than the provisions set forth in the preceding sentence, then (a) each holder of shares of Stock acquired pursuant to the Plan (regardless of whether such person has complied or complies with the provisions of clause (b) below) shall be bound by, and shall be deemed to have agreed to, the same lock-up terms as those to which the Company’s directors and officers are required to adhere; and (b) at the request of the Company or such managing underwriter, each such person shall execute and deliver a lock-up agreement in form and substance equivalent to that which is required to be executed by the Company’s directors and officers.

15.8Placement of Legends; Stop Orders; etc.  Each share of Stock to be issued pursuant to Awards granted under the Plan may bear a reference to the investment representation made in accordance with Section 15.6 in addition to any other applicable restriction under the Plan, the terms of the Award and to the fact that no registration statement has been filed with the Securities and Exchange Commission in respect to such shares of Stock.  All shares of Stock or other securities delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of any stock exchange upon which the Stock is then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any certificates or recorded in connection with book-entry accounts representing the shares to make appropriate reference to such restrictions.

15.9Uncertificated Shares. To the extent that the Plan provides for issuance of certificates to reflect the transfer of Shares, the transfer of such Shares may be effected on a noncertificated basis, to the extent not prohibited by Applicable Law.

15.10Limitation of Rights in Stock. A Participant shall not be deemed for any purpose to be a stockholder of the Company with respect to any of the Shares of Stock subject to an Award, unless and until Shares shall have been issued therefor and delivered to the Participant or his agent.  Any Stock to be issued pursuant to Awards granted under the Plan shall be subject to all restrictions upon the transfer thereof which may be now or hereafter imposed by the Certificate of Incorporation and the Bylaws of the Company.

15.11Employment Not Guaranteed. Nothing in the Plan shall interfere with or limit in any way the right of the Company (or any Affiliate) to terminate any Participant’s Employment at any time, nor confer upon any Participant any right to continue in the employ of the Company (or any Affiliate), subject to the terms of any separate employment or consulting agreement or provision of law or corporate articles or by-laws to the contrary, at any time to terminate such employment or consulting agreement or to increase or decrease, or otherwise adjust, the other terms and conditions of the recipient’s employment or other association with the Company and its Affiliates.

15.12Other Compensation Arrangements. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases.

15.13Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.

15.14Plan Headings. The headings in the Plan are for purposes of convenience only and are not intended to define or limit the construction of the provisions thereof.

15.15Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

15.16Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to Applicable Law and to such approvals by any governmental agencies or national securities exchanges as may be required.

15.17Errors. At any time the Company may correct any error made under the Plan without prejudice to the Company. Such corrections may include, among other things, changing or revoking an issuance of an Award.

21

---

 

15.18Elections and Notices. Notwithstanding anything to the contrary contained in this Plan, all elections and notices of every kind shall be made on forms prepared by the Company or the general counsel, secretary or assistant secretary, or their respective delegates or shall be made in such other manner as permitted or required by the Company or the general counsel, secretary or assistant secretary, or their respective delegates, including but not limited to elections or notices through electronic means, over the Internet or otherwise. An election shall be deemed made when received by the Company (or its designated agent, but only in cases where the designated agent has been appointed for the purpose of receiving such election), which may waive any defects in form. The Company may limit the time an election may be made in advance of any deadline.

Where any notice or filing required or permitted to be given to the Company under the Plan, it shall be delivered to the principal office of the Company, directed to the attention of the general counsel of the Company or his or her successor. Such notice shall be deemed given on the date of delivery.

Notice to the Participant shall be deemed given when mailed (or sent by telecopy) to the Participant’s work or home address as shown on the records of the Company or, at the option of the Company, to the Participant’s e-mail address as shown on the records of the Company.

It is the Participant’s responsibility to ensure that the Participant’s addresses are kept up to date on the records of the Company. In the case of notices affecting multiple Participants, the notices may be given by general distribution at the Participants’ work locations.

15.19Governing Law. To the extent not preempted by Federal law, the Plan, and all awards and agreements hereunder, and any and all disputes in connection therewith, shall be governed by and construed in accordance with the substantive laws of the State of Delaware, without regard to conflict or choice of law principles which might otherwise refer the construction, interpretation or enforceability of this Plan to the substantive law of another jurisdiction.

15.20Venue. The Company and the Participant to whom an Award under this Plan is granted, for themselves and their successors and assigns, irrevocably submit to the exclusive and sole jurisdiction and venue of the state or federal courts of Delaware with respect to any and all disputes arising out of or relating to this Plan, the subject matter of this Plan or any awards under this Plan, including but not limited to any disputes arising out of or relating to the interpretation and enforceability of any awards or the terms and conditions of this Plan. To achieve certainty regarding the appropriate forum in which to prosecute and defend actions arising out of or relating to this Plan, and to ensure consistency in application and interpretation of the Governing Law to the Plan, the parties agree that (a) sole and exclusive appropriate venue for any such action shall be an appropriate federal or state court in Delaware, and no other, (b) all claims with respect to any such action shall be heard and determined exclusively in such Delaware court, and no other, (c) such Delaware court shall have sole and exclusive jurisdiction over the person of such parties and over the subject matter of any dispute relating hereto and (d) that the parties waive any and all objections and defenses to bringing any such action before such Delaware court, including but not limited to those relating to lack of personal jurisdiction, improper venue or forum non conveniens.

15.21No Obligation to Notify. The Company shall have no duty or obligation to any holder of an Option to advise such holder as to the time or manner of exercising such Option. Furthermore, the Company shall have no duty or obligation to warn or otherwise advise such holder of a pending transaction or expiration of an Option or a possible period in which the Option may not be exercised. The Company has no duty or obligation to minimize the tax consequences of an Option to the holder of such Option.

22

 

AMENDED AND RESTATED TRANSITIONAL ADMINISTRATIVE AND
MANAGEMENT SERVICES AGREEMENT

THIS AMENDED AND RESTATED TRANSITIONAL ADMINISTRATIVE AND MANAGEMENT SERVICES AGREEMENT (this “Agreement”) is dated as of August 19, 2022, between The LGL Group, Inc., a Delaware corporation (“LGL”), and M-tron Industries, Inc., a Delaware corporation (“Mtron”, and together with LGL, “Parties”, or each individually, a “Party”).

RECITALS

WHEREAS, the Parties entered into that certain Transitional Administrative and Management Services Agreement, dated as of August 3, 2022 (the “Existing Transitional Administrative and Management Services Agreement”);

WHEREAS, following the consummation of the distribution (the “Distribution”) contemplated by the Amended and Restated Separation and Distribution Agreement dated of even date herewith among LGL and Mtron (the “Distribution Agreement”), Mtron desires that LGL provide certain administrative and management services to Mtron, and LGL desires that Mtron provide certain administrative and management services to LGL;

WHEREAS, subject to the terms and conditions of this Agreement, each Party is willing to provide the other Party with such services for a transitional period; and

WHEREAS, the Parties desire to amend and restate the Existing Transitional Administrative and Management Services Agreement in its entirety and enter into this Amended and Restated Transitional Administrative and Management Agreement.

NOW, THEREFORE, LGL and Mtron agree as follows:

Section 1.Services.  Commencing at the time of the Distribution, LGL agrees to provide, or to coordinate the provision by others, to Mtron the transitional services set forth on Exhibit A hereto (the “LGL Management Services”), and Mtron agrees to provide, or to coordinate the provision by others, to LGL the transitional services set forth on Exhibit B hereto (the “Mtron Management Services” and, together with the LGL Management Services, the “Management Services”). Without limiting the foregoing, the Parties may modify the Management Services from time to time and may identify additional services to incorporate into this Agreement.

(a)Consultants and Other Advisors.  In providing the Management Services, each Party may, subject to the prior written consent of the other Party, employ consultants and other advisors in addition to utilizing its own employees.  The Management Services are intended to be generally comparable in type and quantity to that which a Party provided to the other Party, it affiliates and its businesses prior to the Distribution.

LEGAL_US_E # 165242443.1

 

 

---

 

(b)Subrogation of Rights Vis-A-Vis Third Party Contractors.  In the event any liability arises from the performance of the Management Services hereunder by a third party contractor, upon indemnification of a Party and/or its representatives, including but not limited to such Party’s officers, directors, employees, accountants, counsel, investment bankers, financial advisors and consultants, the other Party shall be subrogated to such rights, if any, as such indemnified Party may have against such third party contractor with respect to the Management Services provided by such third party contractor.

(c)Laws and Governmental Regulations.  Mtron shall be solely responsible for compliance with all laws, rules and regulations including the Investment Advisers Act of 1940.

(d)Relationship of Parties.  Nothing in this Agreement shall be deemed or construed by the Parties or any third party as creating the relationship of principal and agent, partnership or joint venture between the Parties, it being understood and agreed that no provision contained herein, and no actions of the Parties, shall be deemed to create any relationship between the Parties other than the relationship of independent contractor nor be deemed to vest any rights, interest or claims in any third parties.

Section 3.Term; Standard of Care.  Each of LGL and Mtron shall provide its respective Management Services to the other Party as the other Party may request for a period of up to twelve (12) months from the date of the Distribution (“Term”); provided that any or all of the Management Services may be terminated by either Party at any time and for any reason on not less than thirty (30) days’ prior written notice to the other Party.  In providing the Management Services hereunder, each Party will exercise the same degree of care as it has exercised in providing such Management Services to its affiliates prior to the date hereof, including the same level of quality, responsiveness and timeliness as has been exercised by each Party with respect to such Management Services.

(a)Organization. The Parties shall create an operating committee (the “Operating Committee”) and shall each appoint one (1) employee to the Operating Committee for the Term.  The Operating Committee will oversee the implementation and application of this Agreement and shall at all times reasonably and in good faith attempt to resolve any dispute between the Parties. Each of the Parties shall have the right to change its Operating Committee member at any time with employees of comparable knowledge, expertise and decision-making authority.

(b)Decision Making. All Operating Committee decisions shall be taken unanimously. If the Operating Committee fails to make a decision, resolve a dispute, agree upon any necessary action, or if a Party so requests, in the event of a material breach of this Agreement, a senior officer of LGL and a senior officer of Mtron, neither of whom shall have any direct oversight or responsibility for the subject matter in dispute, shall attempt within a period of fourteen (14) days to conclusively resolve any such unresolved issue.

(c)Meetings. During the Term, the Operating Committee members shall meet, in person or via teleconference, at least once in each month, or less frequently if agreed by the

2

 

---

 

members of the Operating Committee. In addition, the Operating Committee shall meet as often as necessary in order to promptly resolve any disputes submitted to it by any representative of either Party.

(a)Charges for Management Services. Each Party will pay the other Party the charges, if any, the applicable charges, if any, set forth on Exhibit A and Exhibit B hereto (collectively, the “Transition Services Schedules”) for the Management Services provided by the other Party set forth herein as may be adjusted, from time to time, in accordance with this Agreement or, if no charges are specifically indicated otherwise on the Transition Services Schedules, the cost of services provided.  The Parties intend, having regard to the reciprocal and transitional nature of the Agreement as well as other factors, for the charges to be easy to administer and justify; and therefore recognize it may be counter-productive to try and recover every cost, charge or expense, particularly those which are insignificant or de minimis.

(b)Taxes. The fees and charges payable under this Agreement are exclusive of any sales tax or excise tax or other similar charges which may be imposed by a governmental authority.  Each Party agrees to remit to the other any such charges promptly upon being billed by the other Party.

(c)Corrections/Adjustments. The Parties agree to develop, through an Operating Committee or their Boards of Directors, mutually acceptable reasonable processes and procedures for conducting any reviews and making adjustments thereof.  Payments will then be promptly billed and paid.

(a)Right to designate and change personnel.  The Party providing the respective Management Services (“Service Provider”) will have the right to designate which personnel it will assign to perform such Management Services.  The Service Provider also will have the right to remove and replace any such personnel at any time or designate any of its affiliates or a Subcontractor (as defined below) at any time to perform the Management Services, subject to the provisions of Section 6(c) hereof: provided, however, that the Service Provider will use Commercially Reasonable Efforts (as defined below) to limit the disruption to the other Party (“Service Recipient”) in the transition of the Management Services to different personnel or to a Subcontractor.  In the event that personnel with the designated level of experience are not then employed by the Service Provider, the Service Provider will use Commercially Reasonable Efforts to provide such personnel or Subcontractor personnel having an adequate level of experience; provided, however, that the Service Provider will have no obligation to retain any individual employee for the sole purpose of providing the applicable Services.  For the purposes of this Agreement, the term “Commercially Reasonable Efforts” means the efforts that a reasonable and prudent person desirous of achieving a business result would use in similar circumstances to ensure that such result is achieved as expeditiously as possible in the context of commercial relations of the type envisaged by this Agreement; provided, however, that an obligation to use Commercially Reasonable Efforts under this Agreement does not require the

3

 

---

 

person subject to that obligation to assume any material obligations or pay any material amounts to a third party.

(b)Financial Responsibility.  The Service Provider will pay for all personnel expenses, including wages, of its employees performing the Management Services.

(c)Service Managers and Chief Representatives.  During the Term of this Agreement, each Party will appoint (i) one of its employees (the “Service Manager”) who will have overall responsibility for managing and coordinating the delivery of the Management Services and who shall serve as such Party’s representative on the Operating Committee and (ii) one of its employees for each service as indicated in each Transition Services Schedule (the “Chief Representative”).  The Service Manager and the Chief Representatives will coordinate and consult with the Service Recipient.  The Service Provider may, at its discretion, select other individuals to serve in these capacities during the Term of this Agreement upon providing notice to the other Party.  For the avoidance of doubt, a Chief Representative may serve as such in respect of one or more Transition Services Schedules.

(d)Subcontractors.

(1)Subcontractors.  The Service Provider may, subject to Section 6(d)(2) hereof, engage a “Subcontractor” to perform all or any portion of the Service Provider’s duties under this Agreement, provided that any such Subcontractor agrees in writing to be bound by confidentiality obligations at least as protective as the terms of Section 10(n) of this Agreement regarding confidentiality and non-use of information, and provided further that the Service Provider remains responsible for the performance of such Subcontractor and for paying the Subcontractor.  As used in this Agreement, “Subcontractor” will mean any person or entity engaged to perform hereunder, other than employees of the Service Provider of its affiliates.

(2)Assignment.  In the event of any subcontracting by the Service Provider to a non-affiliate of the Service Provider of all or any portion of the Service Provider’s duties under this Agreement, the Service Provider shall assign and transfer to the Service Recipient the full benefit of all such non-affiliate subcontractor’s performance covenants, guarantees, warranties or indemnities (if any), to the extent same are transferable or assignable, in the respect of the portion of the Services provided to the Service Recipient pursuant to such subcontracting; and if such guarantees, warranties, indemnities and benefits are not assignable, the Service Provider shall use Commercially Reasonable Efforts to procure the benefit of same for the Service Recipient through other legal permissible means.  The Service Provider will also reasonably endeavor to permit the assignment of any Subcontractor engagement to a Service Recipient or its affiliates at the request of the Service Recipient upon termination of Service hereunder.

(e)Insurance.  Each Party shall obtain and maintain at its own expense insurance of the type generally maintained in the ordinary course of its business.  Except as otherwise specified in the Transition Services Schedules, the Service Provider shall not be required to obtain and maintain any particular insurance in relation to providing any Service.

4

 

---

 

Section 7.Consents of Third Parties.  Each Party shall use commercially reasonable efforts, at the other Party’s direction and expense, to obtain any consents or software licenses from third parties necessary for the continuation of the requested Management Services; provided, that such Party shall have no obligation to provide Management Services for which such consent is required and shall not have been obtained, despite such Party’s use of commercially reasonable efforts to obtain such consent.

Section 8.Limitations of Liability; Indemnification. LGL will indemnify, defend and hold harmless Mtron its affiliates and its businesses and each of their respective directors, officers, agents and employees, and each of the heirs, executors, successors and assigns of any of the foregoing (a “Mtron Indemnitee”) from and against all claims, damages, losses, liabilities, costs, expenses, reasonable attorney’s fees, and court or arbitration costs (“Losses”) (i) arising out of a claim by a third party against a Mtron Indemnitee to the extent resulting from or alleged to have resulted from any act or omission of a member of the LGL Group (as such term is defined in the Distribution Agreement) under or related to this Agreement, or (ii) in the event of (A) the gross negligence, willful misconduct or fraud of a member of the LGL Group; (B) the failure of LGL to perform the LGL Management Services after the Distribution in accordance with the terms of this Agreement; or (C) the breach by LGL of this Agreement.  Mtron will indemnify, defend and hold harmless LGL its affiliates and businesses and each of their respective directors, officers, agents and employees, and each of the heirs, executors, successors and assigns of any of the foregoing (each, a “LGL Indemnitee”), from and against all Losses (i) arising out of a claim by a third party against a LGL Indemnitee to the extent resulting from or alleged to have resulted from any act or omission of a member of the Mtron Group (as such term is defined in the Distribution Agreement) under or related to this Agreement, or (ii) in the event of (A) the gross negligence, willful misconduct or fraud of a member of the Mtron Group; (B) the failure of Mtron to perform the Mtron Management Services after the Distribution in accordance with the terms of this Agreement; or (C) the breach by Mtron of this Agreement.

Section 9.Disclaimer of Warranties.  SUBJECT TO Section 3 HEREOF, EACH OF THE PARTIES DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OR MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE SERVICES PROVIDED HEREUNDER.  NEITHER LGL NOR MTRON MAKES ANY REPRESENTATIONS OR WARRANTIES AS TO THE QUALITY, SUITABILITY OR ADEQUACY OF THE SERVICES FOR ANY PURPOSE OR USE.

(a)Complete Agreement; Construction.  Except as set forth in the Tax Indemnity and Sharing Agreement and the Distribution Agreement, each dated of even date herewith, between the Parties, this Agreement shall constitute the entire agreement between the Parties with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter.

(b)Counterparts.  For the convenience of the Parties hereto, this Agreement may be executed in separate counterparts, each such counterpart being deemed to be an original instrument, and which counterparts shall together constitute the same agreement.

5

 

---

 

(c)Notices.  Any notice, request, instruction or other document to be given hereunder by any Party to the other shall be in writing and shall be deemed to have been duly given (i) on the date of delivery if delivered by facsimile (upon confirmation of receipt) or personally, (ii) on the first business day following the date of dispatch if delivered by FedEx or other next-day courier service, or (iii) on the third business day following the date of mailing if delivered by United States Certified Mail, return receipt requested, postage prepaid.  All notices hereunder shall be delivered as set forth below, or pursuant to such other instructions as may be designated in writing by the Party to receive such notice:

(d)Waivers.  The failure of any Party hereto to require strict performance by any other Party of any provision in this Agreement will not waive or diminish that Party’s right to demand strict performance thereafter of that or any other provision hereof.

(e)Modification or Amendments.  The Parties hereto may modify or amend this Agreement by written agreement executed and delivered by authorized officers of the respective Parties.

(f)Assignment; Successors and Assigns.  No Party to this Agreement shall convey, assign or otherwise transfer any of its rights or obligations under this Agreement without the express written consent of each of the other Party hereto in its sole and absolute discretion.  Any such conveyance, assignment or transfer without the express written consent of each of the other parties shall be void ab initio.  No assignment of this Agreement or any rights hereunder shall relieve each of the assigning parties of its obligations hereunder.  Any successor by merger to a Party to this Agreement shall be substituted for such Party as a party to this Agreement, and all obligations, duties and liabilities of the substituted party under this Agreement shall continue in full force and effect as obligations, duties and liabilities of the substituting party, enforceable against the substituting party as a principal, as though no substitution had been made.

(g)Third Party Beneficiaries.  This Agreement is for the purpose of defining the respective rights and obligations of the Parties hereto and is not for the benefit of any employee; creditor or other third party, except as may be expressly set forth herein.

(h)Indemnification for Expenses; Attorney Fees.  A Party in breach of this Agreement shall, on demand, indemnify and hold harmless the other Party hereto for and against all out-of-pocket expenses, including, without limitation, reasonable legal fees, incurred by such other Party by reason of the enforcement and protection of its rights under this Agreement,

6

 

---

 

should such Party prevail in such action.  The payment of such expenses is in addition to any other relief to which such other Party may be entitled hereunder or otherwise.

(i)Captions.  All Article, Section and paragraph captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof.

(j)Specific Performance.  In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, the Party or Parties who are or are to be thereby aggrieved shall have the right of specific performance and injunctive relief giving effect to its or their rights under this Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative.  The Parties agree that the remedies at law for any breach or threatened breach, including monetary damages, are inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is hereby waived.

(k)Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of Florida, without reference to its conflicts of law principles.

(l)Severability.  If any provision of this Agreement or the application thereof to any person or circumstance is determined to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to persons or circumstances other than those remaining provisions hereof, or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any Party.  Upon any such determination, the Parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the Parties.

(m)Cooperation; Further Assurances.  The Parties will use good faith efforts to cooperate with each other in all matters relating to the provision of the Services.  Each Party will take such actions as may be necessary or reasonably appropriate to implement or give effect to this Agreement.

(n)Records; Confidentiality.  Each Party shall keep full and detailed records dealing with all aspects of the Services performed by it and shall provide access to the other Party to such records at all reasonable times.  Each Party hereto shall keep, and shall cause its officer, directors, employees, accountants, counsel, investment bankers, financial advisors, consultants and other representatives (“Representatives”) to keep the other Party’s information, whether furnished orally or in writing or by any other means or gathered by inspection and regardless of whether the same is specifically marked or designated as “confidential” or “proprietary,” together with any and all notes, memoranda, analyses, compilations, studies or other documents (whether in hard copy or electronic media) prepared by the receiving Party or any of its Representatives which contain or otherwise reflect such information, together with any and all copies, extracts or other reproductions of any of the same (the “Information”), strictly

7

 

---

 

confidential and will disclose such Information only to such of its Representatives who need to know such Information, and who agree to be bound by this Section 10(n) and not to disclose such Information to any other person.  Without the prior written consent of the other parties, neither Party nor any of its respective Representatives shall disclose the other Party’s Information to any person or entity except as may be required by law or judicial process and in accordance with this Section 10(n).  The term “Information” does not include information that: (i) is or becomes generally available to the public through no wrongful act of the receiving Party or its Representatives; (ii) is or becomes available to the receiving Party on a non-confidential basis from a source other than the providing Party or its Representatives, provided that such source is not known by the receiving Party to be subject to a confidentiality agreement with the providing Party; or (iii) has been independently acquired or developed by the receiving Party without violation of any of the obligations of the receiving Party or its Representatives under this Agreement.

(o)Arbitration.  Any dispute with respect to this Agreement shall be arbitrated in Orange County, Florida, in accordance with the rules of the American Arbitration Association and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.  There will be a single neutral arbitrator selected who resides in Orange County, Florida.  The American Arbitration Association will provide a list of five (5) neutral arbitrators.  The claimant and respondent will take turns, with the respondent going first, striking one name at a time from the list of five neutral arbitrators.  Each Party will have no more than twenty-four (24) hours to take its turn striking a name of a neutral arbitrator.  The final remaining arbitrator will serve as the neutral arbitrator.  Either Party may apply to the arbitrator seeking injunctive relief until the arbitrator's award is rendered or the controversy is otherwise resolved.  Either Party also may, without waiving any remedy under this Agreement, seek from any Florida court having jurisdiction, any interim or provisional relief that is necessary to protect the rights and/or property of that Party, pending the determination of the arbitrator.

[Signatures begin on the following page]

 

 

8

 

---

 

 

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

 

 

 

 

 

 

[Signature Page to Transitional Administrative and Management Services Agreement]

 

---

 

 

EXHIBIT A

LGL Management Services

 

 

---

 

 

EXHIBIT B

Mtron Management Services

 

 

AMENDED AND RESTATED TAX INDEMNITY AND SHARING AGREEMENT

BETWEEN

THE LGL GROUP, INC.

AND

M-TRON INDUSTRIES, INC.

Dated as of August 19, 2022

 

 

 

 

---

Table of Contents

Page

 

i

 

---

Table of Contents

(continued)

Page

 

 

ii

 

---

 

 

AMENDED AND RESTATED TAX INDEMNITY AND SHARING AGREEMENT

THIS AMENDED AND RESTATED TAX INDEMNITY AND SHARING AGREEMENT (this “Agreement”) is dated as of August 19, 2022, by and between The LGL Group, Inc., a Delaware corporation (“LGL”), and M-tron Industries, Inc., a Delaware corporation and a wholly-owned subsidiary of LGL (“Mtron”).  Mtron and LGL are the “Parties.” Unless otherwise indicated, all “Section” references in this Agreement are to sections of this Agreement.

RECITALS

WHEREAS, the Parties entered into that certain Tax Indemnity and Sharing Agreement, dated as of August 3, 2022 (the “Existing Tax Indemnity and Sharing Agreement”);

WHEREAS, the board of directors of LGL has determined that it is appropriate and advisable for the Mtron common stock, par value $0.01 per share (“Mtron Common Stock”) that LGL owns to be distributed to holders of LGL common stock, par value $0.01 per share (“LGL Common Stock”) (the “Distribution”), in the amount of one-half of a share of Mtron Common Stock for each share of LGL Common Stock held by a LGL stockholder, on the terms and conditions set forth in the Amended and Restated Separation and Distribution Agreement between LGL and Mtron dated on or about the date hereof (the “Distribution Agreement”);

WHEREAS, LGL intends the Distribution to qualify as a tax-free transaction described under Section 355 of the Code;

WHEREAS, the Parties set forth in the Distribution Agreement the principal arrangements between them regarding the separation of the Mtron Group (as defined below) from the LGL Group (as defined below);

WHEREAS, the Parties desire to provide for and agree upon the allocation between the Parties of liabilities for Taxes arising prior to, as a result of, and subsequent to the Distribution, and to provide for and agree upon other matters relating to Taxes; and

WHEREAS, the Parties desire to amend and restate the Existing Tax Indemnity and Sharing Agreement in its entirety and enter into this Amended and Restated Tax Indemnity and Sharing Agreement.

NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, the Parties hereby agree as follows:

SECTION 1.Definition of Terms

. For purposes of this Agreement (including the recitals hereof), the following terms have the following meanings:

“Affiliate” means, when used with respect to any specified Person, a Person that directly or indirectly Controls, is Controlled by, or is under common Control with such specified Person. Unless explicitly provided herein to the contrary, (x) neither LGL nor any member of the LGL Group shall be deemed to be an Affiliate of Mtron or any of its Subsidiaries; and (y) neither

 

---

 

Mtron nor any member of the Mtron Group shall be deemed to be an Affiliate of LGL or any of its Subsidiaries.

“Agreement” has the meaning set forth in the preamble hereof.

“Ancillary Agreements” means the agreements encompassed by such term in the Distribution Agreement.

“Business Day” shall mean any day other than a Saturday, Sunday or a day on which commercial banking institutions located in The City of New York are authorized or obligated by law or executive order to close.

“Code” means the U.S. Internal Revenue Code of 1986, as amended.

“Combined Return” means a consolidated, combined or unitary Tax Return that includes, by election or otherwise, one or more members of the LGL Group and one or more members of the Mtron Group.

“Companies” means LGL and Mtron.

“Company” means LGL or Mtron, as the context requires.

“Control” means, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through ownership of securities or partnership, membership, limited liability company, or other ownership interests, by contract or otherwise and the terms “Controlling” and “Controlled” have meanings correlative to the foregoing.

“Controlling Party” means, with respect to a Tax Contest, the Person that has responsibility, control and discretion in handling, defending, settling or contesting such Tax Contest.

“Covered Income Taxes” means any Income Taxes.

“Deconsolidation Taxes” means any Taxes imposed on any member of the LGL Group or the Mtron Group as a result of or in connection with the Distribution (or any portion thereof), including, but not limited to, any Taxes imposed pursuant to or as a result of Section 311 or 1502 of the Code or the Treasury Regulations thereunder (and under any applicable similar state, local or foreign law), but excluding any Transfer Taxes and Distribution Taxes.

“Disclosing Party” has the meaning set forth in Section 6.3.

“Distribution” has the meaning set forth in the recitals hereof.

“Distribution Agreement” has the meaning set forth in the recitals hereof.

“Distribution Date” has the meaning set forth in the Distribution Agreement.

2

 

---

 

“Distribution Taxes” means any Taxes arising from a Final Determination that the Distribution failed to be tax-free to LGL in accordance with the requirements of Section 355 of the Code (including any Taxes resulting from the application of Section 355(d) or (e) to the Distribution), or that any stock or obligations  of Mtron failed to qualify as “qualified property” within the meaning of Section 355(c)(2) of the Code, and shall include any Taxes resulting from an election under Section 336(e) of the Code in the circumstances set forth in Section 4.5 hereof.

“Due Date” has the meaning set forth in Section 4.3.

“Effective Time” shall mean 11:59 p.m., New York City time, on the Distribution Date.

“Excess Taxes” means the excess of (x) the Taxes for which LGL Group is liable if an election is made pursuant to Section 336(e) of the Code under Section 4.5 of this Agreement, over (y) the Taxes for which LGL Group is liable if such an election is not made, in each case taking into account the allocation of Taxes that is otherwise applicable in this Agreement but without regard to Section 4.5 hereof.

“Expert Law Firm” means a law firm nationally recognized for its expertise in the matter for which its opinion is sought.

“Fifty-Percent Equity Interest” means, in respect of any corporation (within the meaning of the Code), stock or other equity interests of such corporation possessing (i) at least fifty percent (50%) of the total combined voting power of all classes of stock or equity interests entitled to vote, or (ii) at least fifty percent (50%) of the total value of shares of all classes of stock or of the total value of all equity interests.

“Final Determination” means a determination within the meaning of Section 1313 of the Code or any similar provision of state or local Tax Law.

“Group” means the LGL Group or the Mtron Group, as the context requires.

“Income Taxes” means any Tax which is based upon, measured by, or calculated with respect to (i) net income or profits (including, but not limited to, any capital gains, gross receipts, value added or minimum Tax) or (ii) multiple bases (including, but not limited to, corporate franchise, doing business or occupation Taxes) if one or more of the bases upon which such Tax may be based, by which it may be measured, or with respect to which it may be calculated is described in clause (i) of this sentence.

“Indemnified Party” shall mean each Mtron Indemnified Party and each LGL Indemnified Party, as the context requires.

“Indemnifying Party” has the meaning set forth in Section 4.4.

“Interest Rate” means the Rate determined below, as adjusted as of each Interest Rate Determination Date. The “Rate” means, with respect to each period between two consecutive Interest Rate Determination Dates, a rate determined at approximately 11:00 a.m., New York time, two Business Days before the first Interest Rate Determination Date equal to: (x) the sum of (i) the six-month dollar LIBOR rate as displayed on page “LR” of Bloomberg (or such other

3

 

---

 

appropriate page as may replace such page), plus (ii) 2%, or (y) if higher and if with respect to a payment to indemnify for a Tax to which the “large corporate underpayment” provision within the meaning of Section 6621(c) applies, such interest rate that would be applicable at such time to such “large corporate underpayment.”

“Interest Rate Determination Date” means the Due Date and each March 31, June 30, September 30 and December 31 thereafter.

“LGL” has the meaning set forth in the preamble hereof.

“LGL Common Stock” has the meaning set forth in the recitals to this Agreement.

“LGL Group” means LGL and each Subsidiary of LGL (but only while such Subsidiary is a Subsidiary of LGL) other than any Person that is a member of the Mtron Group (but only during the period such Person is treated as a member of the Mtron Group).

“LGL Indemnified Party” includes each member of the LGL Group, each of their representatives and Affiliates, each of their respective directors, officers, managers and employees, and each of their heirs, executors, trustees, administrators, successors and assigns.

“LGL Tainting Act” means any breach of a representation or covenant made by LGL in Section 7.1 or Section 7.4 of this Agreement, if as a result of such breach a Final Determination is made that the Distribution failed to be tax-free by reason of (i) failing to qualify as a distribution described in Sections 355 of the Code, (ii) any stock or obligations of Mtron failing to qualify as “qualified property” within the meaning of Section 355(c)(2) of the Code or (iii) the application of Sections 355(d) or 355(e) of the Code to the Distribution.

“Mtron” has the meaning set forth in the preamble hereof.

“Mtron Common Stock” has the meaning set forth in the recitals to this Agreement.

“Mtron Group” means (x) with respect to any Tax Year (or portion thereof) ending at or before the Effective Time, Mtron and each of its Subsidiaries at the Effective Time; and (y) with respect to any Tax Year (or portion thereof) beginning after the Effective Time, Mtron and each Subsidiary of Mtron (but only while such Subsidiary is a Subsidiary of Mtron).

“Mtron Indemnified Party” includes each member of the Mtron Group, each of their representatives and Affiliates, each of their respective directors, officers, managers and employees, and each of their heirs, executors, trustees, administrators, successors and assigns.

“Mtron Tainting Act” means a breach of the covenant made by Mtron in Section 7.1 of this Agreement or the taking of a Restricted Action, if as a result of such breach or taking of a Restricted Action a Final Determination is made that the Distribution failed to be tax-free by reason of (i) failing to qualify as a distribution described in Section 355 of the Code, (ii) any stock or obligations of Mtron failing to qualify as “qualified property” within the meaning of Section 355(c)(2) of the Code, or (iii) the application of Sections 355(d) or 355(e) of the Code to the Distribution.

4

 

---

 

“Non-Controlling Party” has the meaning set forth in Section 5.3(a).

“Non-Preparer” means any Company that is not responsible for the preparation and filing of the applicable Tax Return pursuant to Sections 3.1 or 3.2.

“Parties” has the meaning set forth in the preamble hereof.

“Payment Date” means (x) with respect to any U.S. federal income tax return, the date on which any required installment of estimated taxes determined under Section 6655 of the Code is due, the date on which (determined without regard to extensions) filing the return determined under Section 6072 of the Code is required, and the date the return is filed, and (y) with respect to any other Tax Return, the corresponding dates determined under the applicable Tax Law.

“Permitted Acquisition” means any acquisition (as a result of the Distribution) of Mtron Common Stock solely by reason of holding LGL Common Stock, but does not include such an acquisition if such LGL Common Stock, before such acquisition, was itself acquired in a manner to which the flush language of Section 355(e)(3)(A) of the Code applies (thus causing, for the avoidance of doubt, Section 355(e)(3)(A)(i), (ii), (iii) or (iv) not to apply).

“Person” means any individual, corporation, company, partnership, trust, incorporated or unincorporated association, joint venture or other entity of any kind.

“Post-Distribution Period” means any Tax Year or other taxable period beginning after the Distribution Date and, in the case of any Straddle Period, that part of the Tax Year or other taxable period that begins at the beginning of the day after the Distribution Date.

“Pre-Distribution Period” means any Tax Year or other taxable period that ends on or before the Distribution Date and, in the case of any Straddle Period, that part of the Tax Year or other taxable period through the end of the day on the Distribution Date.

“Preparer” means the Company that is responsible for the preparation and filing of the applicable Tax Return pursuant to Sections 3.1 or 3.2.

“Receiving Party” has the meaning set forth in Section 6.3.

“Residual Taxes” means all Taxes other than Covered Income Taxes.

“Restricted Action” means any action by Mtron or any of its Subsidiaries inconsistent with the covenants set forth in Section 7.3; and, for the avoidance of doubt, an action shall be and remain a Restricted Action even if Mtron or any of its Subsidiaries is permitted to take such an action pursuant to Section 7.5.

“Restriction Period” means the period beginning on the Distribution Date and ending twenty-four (24) months after the Distribution Date.

“Separate Return” means (a) in the case of any Tax Return required under relevant Tax Law to be filed by any member of the LGL Group (including any consolidated, combined or unitary Tax Return), any such Tax Return that does not include any member of the Mtron Group,

5

 

---

 

and (b) in the case of any Tax Return required under relevant Tax Law to be filed by any member of the Mtron Group (including any consolidated, combined or unitary Tax Return), any such Tax Return that does not include any member of the LGL Group.

“Straddle Period” means any taxable period beginning on or prior to, and ending after, the Distribution Date.

“Subsidiary” when used with respect to any Person, means (i) (A) a corporation a majority in voting power of whose share capital or capital stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by such Person, by one or more Subsidiaries of such Person, or by such Person and one or more Subsidiaries of such Person, whether or not such power is subject to a voting agreement or similar encumbrance, (B) a partnership or limited liability company in which such Person or a Subsidiary of such Person is, at the date of determination, (1) in the case of a partnership, a general partner of such partnership with the power affirmatively to direct the policies and management of such partnership or (2) in the case of a limited liability company, the managing member or, in the absence of a managing member, a member with the power affirmatively to direct the policies and management of such limited liability company, or (C) any other Person (other than a corporation) in which such Person, one or more Subsidiaries of such Person or such Person and one or more Subsidiaries of such Person, directly or indirectly, at the date of determination thereof, has or have (1) the power to elect or direct the election of a majority of the members of the governing body of such Person, whether or not such power is subject to a voting agreement or similar encumbrance, or (2) in the absence of such a governing body, at least a majority ownership interest or (ii) any other Person of which an aggregate of 50% or more of the equity interests are, at the time, directly or indirectly, owned by such Person and/or one or more Subsidiaries of such Person.

“Tax” or “Taxes” means any income, gross income, gross receipts, profits, capital stock, franchise, withholding, payroll, social security, workers’ compensation, employment, unemployment, disability, property, ad valorem, stamp, excise, severance, occupation, service, sales, use, license, lease, transfer, import, export, value added, alternative minimum, estimated or other similar tax (including any fee, assessment, or other charge in the nature of or in lieu of any tax) imposed by any Tax Authority, any liability attributable to any escheat, abandoned, or unclaimed property law, and any interest, penalties, additions to tax, or additional amounts in respect of the foregoing, together with any reasonable expenses, including attorneys’ fees, incurred in defending against any such Tax.

“Tax Adjustment” has the meaning set forth in Section 4.6.

“Tax Authority” means, with respect to any Tax, the governmental entity or political subdivision, agency, commission or authority thereof that imposes such Tax, and the agency, commission or authority (if any) charged with the assessment, determination or collection of such Tax for such entity or subdivision.

“Tax Benefit” means a reduction in the Tax liability of a taxpayer (or of the affiliated group of which it is a member) for any taxable period. Except as otherwise provided in this Agreement, a Tax Benefit shall be deemed to have been realized or received from a Tax Item in

6

 

---

 

a taxable period only if and to the extent that the Tax liability of the taxpayer (or of the affiliated group of which it is a member) for such period, after taking into account the effect of the Tax Item on the Tax liability of such taxpayer in the current period and all prior periods, is less than it would have been if such Tax liability were determined without regard to such Tax Item.

“Tax Contest” means an audit, review, examination, or any other administrative or judicial proceeding with the purpose, potential or effect of re-determining Taxes of any member of either Group (including any administrative or judicial review of any claim for refund).

“Tax-Free Status” means the qualification of the Distribution as a transaction described in Section 355(a) of the Code.

“Tax Item” means, with respect to any Tax, any item of income, gain, loss, deduction, credit or other attribute that may have the effect of increasing or decreasing any Tax.

“Tax Law” means the law of any governmental entity or political subdivision thereof, and any controlling judicial or administrative interpretations of such law, relating to any Tax.

“Tax Records” means Tax Returns, Tax Return work papers, documentation relating to any Tax Contests, and any other books of account or records required to be maintained under applicable Tax Laws (including but not limited to Section 6001 of the Code) or under any record retention agreement with any Tax Authority.

“Tax Return” means any report of Taxes due, any claims for refund of Taxes paid, any information return with respect to Taxes, or any other similar report, statement, declaration, or document filed or required to be filed (by paper, electronically or otherwise) under any applicable Tax Law, including any attachments, exhibits, or other materials submitted with any of the foregoing, and including any amendments or supplements to any of the foregoing.

“Tax Year” means, with respect to any Tax, the year, or shorter period, if applicable, for which the Tax is reported as provided under applicable Tax Law.

“Transfer Taxes” means all U.S. federal, state, local or foreign sales, use, privilege, transfer, documentary, gains, stamp, duties, recording, and similar Taxes and fees (including any penalties, interest or additions thereto) imposed upon any Party hereto or any of its Affiliates in connection with the Distribution.

“Treasury Regulations” means the regulations promulgated from time to time under the Code as in effect for the relevant Tax Year.

“Unqualified Opinion” means an unqualified “will” opinion of an Expert Law Firm that permits reliance by LGL. For the avoidance of doubt, an Unqualified Opinion may be based on factual representations and assumptions that are reasonably satisfactory to LGL.

7

 

---

 

SECTION 2.Allocation of Taxes and Tax-Related Losses.

2.1Allocation of Taxes

. Except as provided in Section 2.2 (Allocation of Deconsolidation Taxes, Distribution Taxes and Transfer Taxes), Taxes shall be allocated as follows:

(a)LGL shall be liable for and shall be allocated (i) any Taxes attributable to members of the LGL Group for all periods, and (ii) any Covered Income Taxes attributable to members of the Mtron Group for a Pre-Distribution Period.

(b)Mtron shall be liable for and shall be allocated (i) any Residual Taxes attributable to members of the Mtron Group for a Pre-Distribution Period, and (ii) any Taxes attributable to members of the Mtron Group for any Post-Distribution Period.

(c)Notwithstanding the provisions of Sections 2.1(a) and 2.1(b) (but subject to the provisions of Section 2.2), Taxes attributable to any transaction or action taken by or with respect to any member of the Mtron Group before the Effective Time on the Distribution Date shall be allocated to the Pre-Distribution Period, and Taxes attributable to any transaction or action taken by or with respect to any member of the Mtron Group after the Effective Time on the Distribution Date shall be allocated to the Post-Distribution Period.

2.2Allocation of Deconsolidation Taxes, Distribution Taxes and Transfer Taxes

. Notwithstanding any other provision of this Agreement:

(a)Any and all Deconsolidation Taxes shall be borne by LGL.

(b)Mtron shall indemnify and hold harmless each LGL Indemnified Party from and against any liability of LGL for Distribution Taxes to the extent such Distribution Taxes are attributable to an Mtron Tainting Act, provided, however, that Mtron shall have no obligation to indemnify any LGL Indemnified Party hereunder if there has occurred, prior to such Mtron Tainting Act, a LGL Tainting Act.

(c)LGL shall indemnify and hold harmless each Mtron Indemnified Party from and against any liability of Mtron for Distribution Taxes to the extent that Mtron is not liable for such Taxes pursuant to Section 2.2(b).

(d)The Companies shall cooperate with each other and use their commercially reasonable efforts to reduce and/or eliminate any Transfer Taxes. If any Transfer Tax remains payable after application of the first sentence of this Section 2.2(d) and notwithstanding any other provision in this Section 2, all Transfer Taxes shall be allocated to LGL.

2.3Tax Payments

. Each Company shall be liable for and shall pay the Taxes allocated to it by this Section 2 either to the applicable Tax Authority or to the other Company in accordance with Section 4 and the other applicable provisions of this Agreement.

8

 

---

 

SECTION 3.Preparation and Filing of Tax Returns.

3.1Combined Returns

. LGL shall be responsible for preparing and filing (or causing to be prepared and filed) all Combined Returns for any Tax Year, provided, however, that Mtron shall furnish any relevant information, including pro-forma returns, disclosures, apportionment data and supporting schedules, relating to any member of the Mtron Group necessary for completing any Combined Return for any Tax Year in a format suitable for inclusion in such return, and provided further, that Mtron shall have the right to review and comment with respect to items on such returns if and to the extent such items directly relate to Taxes for which Mtron would be liable under Section 2.1(b)(i), such comment not to be unreasonably rejected.

3.2Separate Returns.

(a)Tax Returns to be Prepared by LGL. LGL shall be responsible for preparing and filing (or causing to be prepared and filed):

(i)all Separate Returns which relate to one or more members of the LGL Group for any Tax Year, and

(ii)all Separate Returns which relate to one or more members of the Mtron Group for any Pre-Distribution Period or Straddle Period if such return is in respect of Covered Income Taxes, provided that Mtron shall furnish any relevant information, including pro-forma returns, disclosures, apportionment data and supporting schedules, relating to any member of the Mtron Group necessary for completing any Separate Return for any Pre-Distribution Period or Straddle Period in a format suitable for inclusion in such return, and provided further, that Mtron shall have the right to review and comment with respect to items on such returns if and to the extent such items relate to a Tax for which Mtron would be liable under Section 2.1(b)(i), such comment not to be unreasonably rejected.

(b)Tax Returns to be Prepared by Mtron. Mtron shall be responsible for preparing and filing (or causing to be prepared and filed) all Separate Returns which relate to one or more members of the Mtron Group and for which LGL is not responsible under Section 3.2(a), provided that in the case of such returns in respect of any Pre-Distribution Period or Straddle Period, LGL shall have the right to review and comment on such returns, such comment not to be unreasonably rejected.

3.3Agent

. Subject to the other applicable provisions of this Agreement (including, without limitation, Section 5), Mtron irrevocably designates, and agrees to cause each Affiliate of Mtron so to designate, LGL as its sole and exclusive agent and attorney-in-fact to take such action (including execution of documents) as LGL may deem reasonably appropriate in matters relating to the preparation or filing of any Tax Return described in Sections 3.1 and 3.2(a)(ii).

9

 

---

 

3.4Provision of Information.

(a)LGL shall provide to Mtron, and Mtron shall provide to LGL, any information about members of the LGL Group or the Mtron Group, respectively, that the Preparer reasonably requires to determine the amount of Taxes due on any Payment Date with respect to a Tax Return for which the Preparer is responsible pursuant to Section 3.1 or 3.2 and to properly and timely file all such Tax Returns.

(b)If a member of the Mtron Group supplies information to a member of the LGL Group, or a member of the LGL Group supplies information to a member of the Mtron Group, and an officer of the requesting member intends to sign a statement or other document under penalties of perjury in reliance upon the accuracy of such information, then a duly authorized officer of the member supplying such information shall certify, to the best of such officer’s knowledge, the accuracy of the information so supplied.

3.5Special Rules Relating to the Preparation of Tax Returns.

(a)In General. All Tax Returns that include any members of the Mtron Group or LGL Group, or any of their respective Affiliates, shall be prepared in a manner that is consistent with the qualifying the Distribution for the Tax-Free Status. Except as otherwise set forth in this Agreement, all Tax Returns for which LGL is responsible under Sections 3.1 and 3.2 shall be prepared (x) in accordance with elections, Tax accounting methods and other practices used with respect to such Tax Returns filed prior to the Distribution Date (unless such past practices are not permissible under applicable law), or (y) to the extent any items are not covered by past practices (or in the event such past practices are not permissible under applicable Tax Law), in a manner reasonably acceptable to both Parties; provided, however, that in each case of (x) and (y) to the extent that a change in such elections, methods or practices would not reasonably be expected to result in any adverse impact on Mtron, such Tax Returns shall be prepared in accordance with reasonable practices selected by LGL.

(b)Election to File Consolidated, Combined or Unitary Tax Returns. LGL shall have the sole discretion in electing to file any Tax Return on a consolidated, combined or unitary basis, if such Tax Return would include at least one member of each Group and the filing of such Tax Return is elective under the relevant Tax Law.

3.6Refunds, Credits or Offsets.

(a)Unless otherwise agreed or required by applicable Tax Law, any refunds, credits or offsets with respect to Taxes allocated to, and actually paid by, LGL pursuant to this Agreement shall be for the account of LGL. Unless otherwise agreed or required by applicable Tax Law, any refunds, credits or offsets with respect to Taxes, allocated to, and actually paid by, Mtron pursuant to this Agreement shall be for the account of Mtron.

(b)LGL shall forward to Mtron, or reimburse Mtron for, any such refunds, credits or offsets, plus any interest received thereon, net of any Taxes incurred with respect to the receipt or accrual thereof and any expenses incurred in connection therewith, that are for the account of Mtron within Mtron’s normal course of settlement of such items but not more than 45 days from receipt thereof from receipt thereof by LGL or any of its Affiliates. Mtron shall forward to LGL, or reimburse LGL for, any refunds, credits or offsets, plus any interest received thereon, net of any Taxes incurred with respect to the receipt or accrual thereof and any expenses incurred in connection

10

 

---

 

therewith, that are for the account of LGL within LGL’s normal course of settlement of such items but not more than 45 days from receipt thereof by Mtron or any of its Affiliates. Any refunds, credits or offsets, plus any interest received thereon, or reimbursements not forwarded or made within the period specified above shall bear interest from the date received by the refunding or reimbursing party (or its Affiliates) through and including the date of payment at the Interest Rate (treating the date received as the Due Date for purposes of determining such interest). If, subsequent to a Tax Authority’s allowance of a refund, credit or offset, such Tax Authority reduces or eliminates such allowance, any refund, credit or offset, plus any interest received thereon, forwarded or reimbursed under this Section 3.6 shall be returned to the party who had forwarded or reimbursed such refund, credit or offset and interest upon the request of such forwarding party in an amount equal to the applicable reduction, including any interest received thereon.

3.7Carrybacks

. To the extent permitted under applicable Tax Laws, the Mtron Group shall make the appropriate elections in respect of any Tax Returns to waive any option to carry back any net operating loss, any credits or any similar item from a Post-Distribution Period to any Pre-Distribution Period or to any Straddle Period. Any refund of or credit for Taxes resulting from any such carryback by a member of the Mtron Group that cannot be waived shall be payable to Mtron net of any Taxes incurred with respect to the receipt or accrual thereof and any expenses incurred in connection therewith.

3.8Amended Returns

. Any amended Tax Return or claim for Tax refund, credit or offset with respect to any member of the Mtron Group may be made only by the Company (or its Affiliates) responsible for preparing the original Tax Return with respect to such member pursuant to Sections 3.1 or 3.2 (and, for the avoidance of doubt, subject to the same review and comment rights set forth in Sections 3.1 or 3.2, to the extent applicable). Such Company (or its Affiliates) shall not, without the prior written consent of the other Company (which consent shall not be unreasonably withheld or delayed), file, or cause to be filed, any such amended Tax Return or claim for Tax refund, credit or offset to the extent that such filing, if accepted, is likely to increase the Taxes allocated to, or the Tax indemnity obligations under this Agreement of, such other Company for any Tax Year (or portion thereof); provided, however, that such consent need not be obtained if the Company filing the amended Tax Return by written notice to the other Company agrees to indemnify the other Company for the incremental Taxes allocated to, or the incremental Tax indemnity obligation resulting under this Agreement to, such other Company as a result of the filing of such amended Tax Return.

SECTION 4.Tax Payments.

4.1Payment of Taxes to Tax Authority

. LGL shall be responsible for remitting to the proper Tax Authority the Tax shown on any Tax Return for which it is responsible for the preparation and filing pursuant to Section 3.1 or Section 3.2, and Mtron shall be responsible for remitting to the proper Tax Authority the Tax shown on any Tax Return for which it is responsible for

11

 

---

 

the preparation and filing pursuant to Section 3.2.

4.2Indemnification Payments.

(a)Tax Payments Made by the LGL Group. If any LGL Indemnified Party is required to make a payment to a Tax Authority for Taxes allocated to Mtron under this Agreement, Mtron will pay the amount of Taxes allocated to it to LGL not later than the later of (i) five Business Days after receiving notification requesting such amount, and (ii) one Business Day prior to the date such payment is required to be made to such Tax Authority.

(b)Tax Payments Made by the Mtron Group. If any Mtron Indemnified Party is required to make a payment to a Tax Authority for Taxes allocated to LGL under this Agreement, LGL will pay the amount of Taxes allocated to it to Mtron not later than the later of (i) five (5) Business Days after receiving notification requesting such amount, and (ii) three (3) Business Days prior to the date such payment is required to be made to such Tax Authority.

4.3Interest on Late Payments

. Payments pursuant to this Agreement that are not made by the date prescribed in this Agreement or, if no such date is prescribed, not later than five (5) Business Days after demand for payment is made (the “Due Date”) shall bear interest for the period from and including the date immediately following the Due Date through and including the date of payment at the Interest Rate. Such interest will be payable at the same time as the payment to which it relates. Interest will be calculated on the basis of a year of 365 days and the actual number of days for which due.

4.4Tax Consequences of Payments

. For all Tax purposes and to the extent permitted by applicable Tax Law, the parties hereto shall treat any payment made pursuant to this Agreement as a capital contribution or a distribution, as the case may be, immediately prior to the Distribution. If the receipt or accrual of any indemnity payment under this Agreement causes, directly or indirectly, an increase in the taxable income of the recipient under one or more applicable Tax Laws, such payment shall be increased so that, after the payment of any Taxes with respect to the payment, the recipient thereof shall have realized the same net amount it would have realized had the payment not resulted in taxable income. For the avoidance of doubt, any liability for Taxes due to an increase in taxable income described in the immediately preceding sentence shall be governed by this Section 4.4 and not by Section 2.2. To the extent that Taxes for which any Party hereto (the “Indemnifying Party”) is required to pay an Indemnified Party pursuant to this Agreement may be deducted or credited in determining the amount of any other Taxes required to be paid by the Indemnified Party (for example, state Taxes which are permitted to be deducted in determining federal Taxes), the amount of any payment made to the Indemnified Party by the Indemnifying Party shall be decreased by taking into account any resulting reduction in other Taxes actually realized by the Indemnified Party. If such a reduction in Taxes of the Indemnified Party occurs following the payment made to the Indemnified Party with respect to the relevant indemnified Taxes, the Indemnified Party shall promptly repay the

12

 

---

 

Indemnifying Party the amount of such reduction when actually realized. If the Tax Benefit arising from the foregoing reduction of Taxes described in this Section 4.4 is subsequently decreased or eliminated, then the Indemnifying Party shall promptly pay the Indemnified Party the amount of the decrease in such Tax Benefit.

4.5Section 336(e) Election.

(a)LGL and Mtron shall make a protective election under Section 336(e) of the Code (and any similar election under state or local law) with respect to the Distribution in accordance with Treasury Regulations Section 1.336-2(h) and (j) (and any applicable provisions under state and local law), provided that Mtron shall indemnify LGL for any cost to the LGL Group of making such an election (but it being understood that any such cost arising from Taxes shall be limited to Excess Taxes). LGL and Mtron shall cooperate in the timely completion and filings of such elections and any related filings or procedures (including filing or amending any Tax Returns to implement an election that becomes effective).  This Section 4.5 is intended to constitute a binding, written agreement to make an election under Section 336(e) of the Code with respect to the Distribution.

(b)If Taxes are allocated to a Party (the “Responsible Party”) as a result of any election set forth in this Section 4.5, then to the extent that such Taxes give rise to a Tax Benefit, other than a refund, credit or offset as described in Section 3.6(b), to the other Party (the “Other Party”) or any of its Affiliates, and such Tax Benefit results in an actual reduction in Taxes (determined on a with and without basis) of the Other Party or any of its Affiliates in any Tax Year, the Other Party shall pay to the Responsible Party in the relevant Tax Year an amount equal to such reduction in Taxes (determined on a with and without basis); provided, however, that this provision shall not apply to the extent that the actual reduction in Taxes for the relevant Tax Year and any unpaid reduction in Taxes for all prior Tax Years is less than $50,000.

4.6Certain Final Determinations

. If an adjustment (a “Tax Adjustment”) pursuant to a Final Determination in a Tax Contest initiated by a Tax Authority results in a Tax greater than the Tax shown on the relevant Tax Return for any Pre-Distribution Period, the Indemnified Party shall pay to the Indemnifying Party an amount equal to any Tax Benefit as and when actually realized by such Indemnified Party as a result of such Tax Adjustment. The Parties agree that if an Indemnified Party is required to make a payment to an Indemnifying Party pursuant to this Section 4.6, the Parties shall negotiate in good faith to set off the amount of such payment against any indemnity payments owed by the Indemnifying Party to the Indemnified Party, taking into account time value and similar concepts as appropriate.

SECTION 5.Cooperation and Tax Contests.

5.1Cooperation

. In addition to the obligations enumerated in Sections 3.4 and 5.4, LGL and Mtron will cooperate (and cause their respective Subsidiaries and Affiliates to cooperate) with each other and with each other’s agents, including accounting firms and legal counsel, in connection with Tax matters, including provision of relevant

13

 

---

 

documents and information in their possession and making available to each other, as reasonably requested and available, personnel (including officers, directors, employees and agents of the Parties or their respective Subsidiaries or Affiliates) responsible for preparing, maintaining, and interpreting information and documents relevant to Taxes, and personnel reasonably required as witnesses or for purposes of providing information or documents in connection with any administrative or judicial proceedings relating to Taxes.

5.2Notices of Tax Contests

. Each Company shall provide prompt notice to the other Company of any pending or threatened Tax audit, assessment or proceeding or other Tax Contest of which it becomes aware relating to (i) Taxes for which it is or may be indemnified by such other Company hereunder or (ii) Tax Items that may affect the amount or treatment of Tax Items of such other Company. Such notice shall contain factual information (to the extent known) describing any asserted Tax liability in reasonable detail and shall be accompanied by copies of any notice and other documents received from any Tax Authority in respect of any such matters; provided, however, that failure to give such notification shall not affect the indemnification provided hereunder except, and only to the extent that, the indemnifying Company shall have been actually prejudiced as a result of such failure. Thereafter, the indemnified Company shall deliver to the indemnifying Company such additional information with respect to such Tax Contest in its possession that the indemnifying Company may reasonably request.

5.3Control of Tax Contests.

(a)Controlling Party. Subject to the limitations set forth in Section 5.3(b), each Preparer (or the appropriate member of its Group) shall be the Controlling Party with respect to any Tax Contest involving a Tax reported (or that, it is asserted, should have been reported) on a Tax Return for which such Company is responsible for preparing and filing (or causing to be prepared and filed) pursuant to Section 3 of this Agreement (it being understood, for the avoidance of doubt but subject to the other provisions of this Section 5.3(a), that LGL shall be the Controlling Party with respect to any Tax Contest involving Distribution Taxes), in which case any Non-Preparer that could have liability under this Agreement for a Tax to which such Tax Contest relates shall be treated as the “Non-Controlling Party.” Notwithstanding the immediately preceding sentence, if a Non-Preparer (x) acknowledges to the Preparer in writing its full liability under this Agreement to indemnify for any Tax, and (y) provides to the Preparer evidence (that is satisfactory to the Preparer as determined in the Preparer’s reasonable discretion) of the Non-Preparer’s financial readiness and capacity to make such indemnity payment, then thereafter with respect to the Tax Contest relating solely to such Tax the Non-Preparer shall be the Controlling Party (subject to Section 5.3(b)) and the Preparer shall be treated as the Non-Controlling Party.

(b)Non-Controlling Party Participation Rights. With respect to a Tax Contest of any Tax Return that could result in a Tax liability that is allocated under this Agreement, (i) the Non-Controlling Party shall, at its own cost and expense, be entitled to participate in such Tax Contest and to provide comments and suggestions to the Controlling Party, such comments and suggestions to be considered in good faith and not unreasonably rejected, (ii) the Controlling Party shall keep the Non-Controlling Party

14

 

---

 

updated and informed, and shall consult with the Non-Controlling Party, (iii) the Controlling Party shall act in good faith with a view to the merits in connection with the Tax Contest, and (iv) the Controlling Party shall not settle or compromise such Tax Contest without the prior written consent of the Non-Controlling Party (which consent shall not be unreasonably withheld).

5.4Cooperation Regarding Tax Contests

. The Parties shall provide each other with all information relating to a Tax Contest which is needed by the other Party to handle, participate in, defend, settle or contest the Tax Contest. At the request of any party, the other Party shall take any action (e.g., executing a power of attorney) that is reasonably necessary in order for the requesting Party to exercise its rights under this Agreement in respect of a Tax Contest. Mtron shall assist LGL, and LGL shall assist Mtron, in taking any remedial actions that are necessary or desirable to minimize the effects of any adjustment made by a Tax Authority. The Indemnifying Party shall reimburse the Indemnified Party for any reasonable out-of-pocket costs and expenses incurred in complying with this Section 5.4.

SECTION 6.Tax Records.

6.1Retention of Tax Records

. Each of LGL and Mtron shall preserve, and shall cause their respective Subsidiaries to preserve, all Tax Records that are in their possession, and that could affect the liability of any member of the other Group for Taxes, for as long as the contents thereof may become material in the administration of any matter under applicable Tax Law, but in any event until the later of (x) the expiration of any applicable statute of limitations, as extended, and (y) seven (7) years after the Distribution Date.

6.2Access to Tax Records

. Mtron shall make available, and cause its Subsidiaries to make available, to members of the LGL Group for inspection and copying (x) all Tax Records in their possession that relate to a Pre-Distribution Period, and (y) the portion of any Tax Record in their possession that relates to a Post-Distribution Period and which is reasonably necessary for the preparation of a Tax Return by a member of the LGL Group or any of their Affiliates or with respect to any Tax Contest with respect to such return. LGL shall make available, and cause its Subsidiaries to make available, to members of the Mtron Group for inspection and copying the portion of any Tax Record in their possession that relates to a Pre-Distribution Period and which is reasonably necessary for the preparation of a Tax Return by a member of the Mtron Group or any of their Affiliates or with respect to any Tax Contest with respect to such return.

6.3Confidentiality

. Each party hereby agrees that it will hold, and shall use its reasonable best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence all records and information prepared and shared by and among the Parties in carrying out the intent of this Agreement, except as may otherwise be necessary in connection with the filing of Tax Returns or any administrative or judicial proceedings relating to Taxes or unless disclosure is compelled by a governmental authority. Information and documents of one Party (the “Disclosing Party”) shall not be deemed to be confidential for purposes of this Section 6.3 to the extent that such information or document (i) is previously known to or in the possession of the other Party

15

 

---

 

(the “Receiving Party”) and is not otherwise subject to a requirement to be kept confidential, (ii) becomes publicly available by means other than unauthorized disclosure under this Agreement by the Receiving Party or (iii) is received from a third party without, to the knowledge of the Receiving Party after reasonable diligence, a duty of confidentiality owed to the Disclosing Party.

SECTION 7.Representations and Covenants.

7.1Covenants of LGL and Mtron.

(a)LGL hereby covenants that, to the fullest extent permissible under U.S. federal and state income Tax Laws, it will, and will cause the members of the LGL Group to, treat the Distribution in accordance with the Tax-Free Status. Mtron hereby covenants that, to the fullest extent permissible under U.S. federal and state income Tax Laws, it will, and will cause each Subsidiary of Mtron to, treat the Distribution in accordance with the Tax-Free Status.

(b)LGL further covenants that, as of and following the date hereof, LGL shall not and shall cause the members of the LGL Group not to take any action that (or fail to take any action the omission of which) (i) would be inconsistent with the Distribution qualifying, or would preclude the Distribution from qualifying, for the Tax-Free Status, or (ii) would cause any holders of LGL Common Stock that receive stock of Mtron in the Distribution to recognize gain or loss, or otherwise include any amount in income, as a result of the Distribution for U.S. federal income tax purposes (except with respect to cash received in lieu of fractional shares).

(c)Mtron further covenants that, as of and following the date hereof, Mtron shall not and shall cause its Subsidiaries not to take any action that (or fail to take any action the omission of which) (i) would be inconsistent with the Distribution qualifying, or would preclude the Distribution from qualifying, for the Tax-Free Status, including but not limited to within two (2) years of the Distribution Date not entering into any agreement, understanding or arrangement (or substantial negotiations with respect to a transaction) involving the substantial acquisition of stock of Mtron or a substantial shift in ownership (by vote or value) of Mtron and shall not issue any additional shares of capital stock, or transfer or modify any option, warrant, convertible obligation or other instrument that provides for the right or possibility to issue, redeem or transfer any equity interest in Mtron (other than pursuant to and in conformity with Code Sections 83, 414(b), (c), (m) or (o), or 421 as provided in Safe Harbors 8 or 9 of Treasury Regulations Section 1.355-7(d)(8) or (9) or based on advice from an Expert Law Firm would not cause a violation of Code Section 355(d) or (e)), or (ii) would cause any holders of LGL Common Stock that receive stock of Mtron in the Distribution to recognize gain or loss, or otherwise include any amount in income, as a result of the Distribution for U.S. federal income tax purposes (except with respect to cash received in lieu of fractional shares).

7.2Covenants of Mtron.

16

 

---

 

Without limiting the generality of the provisions of Section 7.1, Mtron, on behalf of itself and its Subsidiaries, agrees and covenants that Mtron and each of its Subsidiaries will not, directly or indirectly, during the Restriction Period, (i) take any action that would result in Mtron’s ceasing to be engaged in the active conduct of the Mtron business as of the date of signing this Agreement with the result that Mtron is not engaged in the active conduct of a trade or business within the meaning of Section 355(b)(2) of the Code, (ii) redeem or otherwise repurchase (directly or through an Affiliate of Mtron) any of Mtron’s outstanding stock, other than through stock purchases meeting the requirements of Section 4.05(1)(b) of Revenue Procedure 96-30, 1996-1 C.B. 696, (iii) amend the certificate of incorporation (or other organizational documents) of Mtron that would affect the relative voting rights of separate classes of Mtron’s stock or would convert one class of Mtron’s stock into another class of its stock, (iv) liquidate (within the meaning of Section 331 of the Code and the Treasury Regulations promulgated thereunder) or partially liquidate (within the meaning of Section 346 of the Code and the Treasury Regulations promulgated thereunder) or dissolve Mtron, (v) merge or consolidate Mtron with any other corporation (other than in a transaction that does not affect the relative shareholding of Mtron shareholders), sell or otherwise dispose of (other than in the ordinary course of business) the assets of Mtron and its Subsidiaries, or take any other action or actions if such merger, sale, other disposition or other action or actions in the aggregate would have the effect that one or more Persons acquire (or have the right to acquire), directly or indirectly, as part of a plan or series of related transactions, assets representing one-half or more of the asset value of the Mtron Group, or (vi) take any other action or actions that in the aggregate would have the effect that one or more Persons acquire (or have the right to acquire), directly or indirectly, as part of a plan or series of related transactions, stock or equity securities of Mtron representing a Fifty-Percent Equity Interest in Mtron, other than a Permitted Acquisition.

7.3Covenants of LGL.

(a)Without limiting the generality of the provisions of Section 7.1, LGL, on behalf of itself and each member of the LGL Group, agrees and covenants that LGL and each member of the LGL Group will not, directly or indirectly, during the Restriction Period, (i) take any action that would result in LGL’s ceasing to be engaged in the active conduct of the LGL business as of the date of signing this Agreement with the result that LGL is not engaged in the active conduct of a trade or business within the meaning of Section 355(b)(2) of the Code, (ii) redeem or otherwise repurchase (directly or through an Affiliate of LGL) any of LGL’s outstanding stock, other than through stock purchases meeting the requirements of section 4.05(1)(b) of Revenue Procedure 96-30, 1996-1 C.B. 696, (iii) amend the certificate of incorporation (or other organizational documents) of LGL that would affect the relative voting rights of separate classes of LGL’s stock or would convert one class of LGL’s stock into another class of its stock, (iv) liquidate (within the meaning of Section 331 of the Code and the Treasury Regulations promulgated thereunder) or partially liquidate (within the meaning of Section 346 of the Code and the Treasury Regulations promulgated thereunder) LGL, (v) merge LGL with

17

 

---

 

any other corporation (other than in a transaction that does not affect the relative shareholding of LGL shareholders), sell or otherwise dispose of (other than in the ordinary course of business) the assets of LGL and its Subsidiaries, or take any other action or actions if such merger, sale, other disposition or other action or actions in the aggregate would have the effect that one or more Persons acquire (or have the right to acquire), directly or indirectly, as part of a plan or series of related transactions, assets representing one-half or more of the asset value of the LGL Group, or (vi) take any other action or actions that in the aggregate would have the effect that one or more Persons acquire (or have the right to acquire), directly or indirectly, as part of a plan or series of related transactions, stock or equity securities of LGL representing a Fifty-Percent Equity Interest in LGL.

(b)Nothing in this Section 7 shall be construed to give Mtron or any Affiliates of Mtron any right to remedies other than indemnification for any increase in the actual Tax liability (and/or decrease in Tax Benefit) of Mtron or any Affiliate of Mtron that results from LGL Group’s failure to comply with the covenants and representations in this Section 7.

7.4Exceptions.

(a)Notwithstanding Section 7.2 above, Mtron or any of its Subsidiaries may take a Restricted Action if LGL consents in writing to such Restricted Action, or if Mtron provides LGL with an Unqualified Opinion (that is reasonably satisfactory to LGL in both form and substance), concluding that such Restricted Action will not alter the Tax-Free Status of the Distribution in respect of LGL and LGL’s shareholders.

(b)Mtron and each of its Subsidiaries agree that LGL and each Affiliate of LGL are to have no liability for any Tax resulting from any Restricted Actions permitted pursuant to this Section 7.4 and, subject to Section 2.2, agree to indemnify and hold harmless each LGL Indemnified Party against any such Tax. Mtron shall bear all costs incurred by it, and all reasonable costs incurred by LGL, in connection with requesting and/or obtaining any Unqualified Opinion reasonably satisfactory to LGL in both form and substance.

7.5Injunctive Relief

. For the avoidance of doubt, LGL shall have the right to seek injunctive relief to prevent Mtron or any of its Subsidiaries from taking any action that is not consistent with the covenants of the Mtron or any of its Subsidiaries under Section 7.1 or 7.2.

7.6Further Assurances

. For the avoidance of doubt, (i) neither LGL nor a member of the LGL Group shall take any action on the Distribution Date that would result in an increase of the actual Tax liability (or decrease of any Tax Benefit) of Mtron or any of its Subsidiaries, other than in the ordinary course of business, except for actions undertaken in connection with the Distribution, and (ii) neither Mtron nor any of its Subsidiaries shall take any action on the Distribution Date that would result in an increase of the actual Tax liability (and/or decrease of any Tax Benefit) of LGL or a member of the LGL Group, other

18

 

---

 

than in the ordinary course of business, except for actions undertaken in connection with the Distribution.

SECTION 8.General Provisions.

8.1Predecessors or Successors

. Any reference to LGL, Mtron, a Person, or a Subsidiary in this Agreement shall include any predecessors or successors (e.g., by merger or other reorganization, liquidation, conversion, or election under Treasury Regulations Section 301.7701-3) of LGL, Mtron, such Person, or such Subsidiary, respectively, including within the meaning of Section 355(e)(4)(D) of the Code and the Treasury Regulations promulgated thereunder. For the avoidance of doubt, no member of the LGL Group shall be deemed to be a predecessor or successor of Mtron and no member of the Mtron Group shall be deemed to be a predecessor or successor of LGL.

8.2Construction

. This Agreement shall constitute the entire agreement (except insofar and to the extent that it specifically and expressly references the Distribution Agreement and any other Ancillary Agreement) between the Parties with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter.

8.3Ancillary Agreements

. This Agreement is not intended to address, and should not be interpreted to address, the matters specifically and expressly covered by the Distribution Agreement or any other Ancillary Agreement.

8.4Counterparts

. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the Parties and delivered to the other Party.

8.5Notices

. All notices and other communications hereunder shall be in writing, shall reference this Agreement and shall be hand delivered or mailed by registered or certified mail (return receipt requested) to the Parties at the following addresses (or at such other addresses for a Party as shall be specified by like notice) and will be deemed given on the date on which such notice is received:

To LGL:

The LGL Group, Inc.
249 Royal Palm Way Suite 503
Palm Beach, FL 33480
Attention: Ivan Arteaga, Chief Financial Officer

To Mtron:

M-tron Industries, Inc.
2525 Shader Road
Orlando, FL 32804
Attention: James W. Tivy, Chief Financial Officer

19

 

---

 

8.6Amendments

. This Agreement may not be modified or amended except by an agreement in writing signed by each of the Parties.

8.7Assignment

. This Agreement shall not be assignable, in whole or in part, directly or indirectly, by any Party without the prior written consent of the other Party, and any attempt to assign any rights or obligations arising under this Agreement without such consent shall be void; provided that, subject to compliance with Section 7, if applicable, either Party may assign this Agreement to a purchaser of all or substantially all of the properties and assets of such Party so long as such purchaser expressly assumes, in a written instrument in form reasonably satisfactory to the non-assigning Party, the due and punctual performance or observance of every agreement and covenant of this Agreement on the part of the assigning Party to be performed or observed.

8.8Successors and Assigns

. The provisions to this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Parties and their respective successors and permitted assigns.

8.9Change in Law

. Any reference to a provision of the Code or any other Tax Law shall include a reference to any applicable successor provision or law.

8.10Authorization, Etc

. Each of the Parties hereto hereby represents and warrants that it has the power and authority to execute, deliver and perform this Agreement, that this Agreement has been duly authorized by all necessary corporate action on the part of such Party, that this Agreement constitutes a legal, valid and binding obligation of such Party and that the execution, delivery and performance of this Agreement by such Party does not contravene or conflict with any provision of law or the Party’s charter or bylaws or any agreement, instrument or order binding such Party.

8.11Termination

. This Agreement may be terminated at any time prior to the Distribution by and in the sole discretion of LGL without the approval of Mtron or the stockholders of LGL. In the event of such termination, no Party shall have any liability of any kind to any other Party or any other Person. After the Distribution, this Agreement may not be terminated except by an agreement in writing signed by the Parties.

8.12Subsidiaries

. Each of the Parties shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any entity that is contemplated to be a Subsidiary of such Party after the Distribution Date.

8.13Third-Party Beneficiaries

. Except with respect to LGL Indemnified Parties and Mtron Indemnified Parties, and in each case, only where and as indicated herein, this Agreement is solely for the benefit of the Parties and their respective Subsidiaries and Affiliates and should not be deemed to confer upon any other Person any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. Notwithstanding anything in this Agreement to the contrary,

20

 

---

 

this Agreement is not intended to confer upon any Mtron Indemnified Parties any rights or remedies against Mtron hereunder, and this Agreement is not intended to confer upon any LGL Indemnified Parties any rights or remedies against LGL hereunder.

8.14Titles and Headings

. Titles and headings to Sections herein are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.

8.15Governing Law

. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida applicable to contracts made and to be performed in the State of New York.

8.16Waiver of Jury Trial

. The Parties hereby irrevocably waive any and all right to trial by jury in any legal proceeding arising out of or related to this Agreement or the transactions contemplated hereby.

8.17Severability

. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The Parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

8.18No Strict Construction; Interpretation.

(a)Each of LGL and Mtron acknowledges that this Agreement has been prepared jointly by the Parties hereto and shall not be strictly construed against any Party hereto.

(b)The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include”, “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation”. The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term. Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statutes and references to all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.

21

 

---

 

[Signatures begin on the following page]

 

 

22

 

---

 

 

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by the respective officers as of the date first set forth above.

 

 

 

 

[Signature Page to Tax Indemnity and Sharing Agreement]

Exhibit 99.1

INFORMATION STATEMENT

M-tron Industries, Inc.

COMMON STOCK, PAR VALUE $0.01 PER SHARE

This information statement is being furnished by The LGL Group, Inc., a Delaware corporation (the “Company”), in connection with its spin-off (the “spin-off”) of M-tron Industries, Inc., a Delaware corporation (“Mtron,” “we,” “us” and “our”).  Mtron is currently a wholly-owned subsidiary of the Company but, as described below, will become a separate, publicly-traded company as a result of the spin-off.  Mtron is an operating subsidiary engaged in the manufacture of electronic components and its business includes the operations of Piezo Technology, Inc., M-tron Asia, LLC and other related subsidiaries.  It has design and manufacturing facilities in Orlando, Florida and Yankton, South Dakota.

The Company will continue as a separate, publicly-traded company following the spin-off, with its business consisting of the operation of its subsidiary, Precise Time and Frequency, LLC, a Delaware limited liability company and manufacturer of time and frequency instruments.  It has a design and manufacturing facility in Wakefield, Massachusetts.

To effect the spin-off, the Company will distribute shares of common stock, par value $0.01 per share, of Mtron (“Mtron Common Stock”) held by it on a pro rata basis to the Company’s stockholders (the “distribution”).  As a stockholder of the Company, you will receive one-half share of Mtron Common Stock for each share of the Company’s common stock, par value $0.01 per share, held of record by you as of 5:00 P.M., Eastern time, on September 30, 2022, the record date for the distribution (such date and time, the “record date”).  As a result, the stockholders of the Company prior to the spin-off will become the stockholders of Mtron after the spin-off.

We expect that the distribution will occur on October 7, 2022 (the “distribution date”).  Immediately after the distribution, Mtron will be a separate, publicly-traded company.  The spin-off will not impact your holdings of the Company’s common stock, and, accordingly, your proportionate interest in the Company will not change as a result of the spin-off.  The distribution is intended to be tax-free for U.S. federal income tax purposes.  See “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

The Company held a special meeting of its stockholders on June 21, 2022 and received approval of the proposed spin-off by the required vote of the stockholders.  You do not need to pay any consideration, exchange or surrender your existing shares of the Company’s common stock or take any other action to receive your shares of Mtron Common Stock.

Prior to the spin-off, the Company will own all of the outstanding shares of Mtron Common Stock.  Accordingly, there is no current trading market for Mtron Common Stock.  We intend to list Mtron Common Stock on the NYSE American, under the symbol “MPTI”.  We expect that the Mtron Common Stock will be listed on the NYSE American on or promptly after the distribution date. However, there is no assurance that an active public market for Mtron Common Stock will develop or be sustained after the spin-off.  If an active public market does not develop or is not sustained, it may be difficult for Mtron’s stockholders to sell their shares of Mtron Common Stock at a price that is attractive to them, or at all.  It is expected that a limited trading in the over-the-counter market, commonly known as a “when-issued” trading market, for shares of Mtron Common Stock will begin one trading day before the record date and that “regular way” trading of the Mtron Common Stock will begin the first day of trading after the distribution date.

The Company’s common stock is listed on the NYSE American.  It is anticipated that, beginning on the record date and continuing until the time of the distribution, there will be two markets in shares of the Company’s common stock on the NYSE American: a “regular-way” market and an “ex-distribution” market.  Shares of the Company’s common stock that trade on the “regular-way” market will trade with an entitlement to the shares of Mtron Common Stock to be distributed in the spin-off in respect thereof.  Shares of the Company’s common stock that trade on the “ex-distribution” market will trade without an entitlement to shares of Mtron Common Stock.  Therefore, if a stockholder sells shares of the Company’s common stock in the “regular-way” market on or prior to the time of the distribution, such stockholder will also be selling the right to receive the shares of Mtron Common Stock that such stockholder would have otherwise received in the spin-off in respect of the shares of the Company’s common stock being sold.  If a stockholder owns shares of the Company’s common stock on the record date and sells those shares on the “ex-distribution” market on or prior to the time of the distribution, such stockholder will continue to be entitled to receive the shares of Mtron Common Stock which are distributed in the spin-off in respect of the shares of the Company’s common stock being sold.

You are encouraged to consult with your broker, financial and/or tax advisors regarding the specific implications of selling your shares of the Company’s common stock prior to or on the distribution date.

Mtron is an “emerging growth company” as defined under applicable U.S. federal securities laws and, as such, has provided more limited disclosures in this information statement than an issuer that would not so qualify and also intends to elect to comply with the reduced public company reporting requirements for emerging growth companies in its future filings for so long as it is permitted to do so.  See “Summary—Implications of Being an Emerging Growth Company.”

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 14.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this information statement is truthful or complete.  Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell, or the solicitation of an offer to buy, any securities.

The date of this information statement is August 19, 2022.

This information statement will be first mailed to the Company’s stockholders on or about October 7, 2022.

 

 

---

 

 

 

Table of Contents

 

 

 

 

 

---

 

 

Summary

The following is a summary of material information discussed in this information statement.  This summary may not contain all the details concerning the spin-off or other information that may be important to you.  To better understand the spin-off and Mtron’s business and financial position, you should carefully review this entire information statement.  Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement, including the condensed combined financial statements and combined financial statements of Mtron, assumes the completion of all the transactions referred to in this information statement in connection with the spin-off.  Unless the context otherwise requires, references in this information statement to “Mtron”, “we”, “us” and “our” and “our company” refer to M-tron Industries, Inc., a Delaware corporation.  References in this information statement to “the Company” refer to The LGL Group, Inc., a Delaware corporation, and its consolidated subsidiaries (other than, after the spin-off, Mtron and its consolidated subsidiaries), unless the context otherwise requires.

References in this information statement to the historical assets, liabilities, products, businesses or activities of Mtron are generally intended to refer to the historical assets, liabilities, products, businesses or activities of the businesses of Mtron as they have been conducted as part of the Company’s organization.

You should not assume that the information contained in this information statement is accurate as of any date other than the date set forth on the cover.  Changes to the information contained in this information statement may occur after that date, and we undertake no obligation to update the information, except as required by law.

This information statement describes our business, our relationship with the Company, and how this transaction affects the Company’s stockholders, and provides other information to assist you in evaluating the benefits and risks of the spin-off and holding or disposing of the shares of Mtron Common Stock received in connection with the spin-off.

1

 

 

---

 

2

 

 

---

 

 

3

 

 

---

 

 

 

Questions and Answers About the Spin-Off

The following provides a summary of certain of the terms of the spin-off.  For a more detailed description of the matters described below, see “The Spin-Off.”

4

 

 

---

 

5

 

 

---

 

6

 

 

---

 

7

 

 

---

 

8

 

 

---

 

 

9

 

 

---

 

 

Summary of the Spin-Off

10

 

 

---

 

11

 

 

---

 

 

12

 

 

---

 

 

 

Risk Factors

You should carefully consider each of the following risks and uncertainties, which we believe are the principal risks that Mtron faces and of which we are currently aware, and all of the other information in this information statement.  Some of the risks and uncertainties described below relate to Mtron’s business.  Other risks relate principally to the spin-off, the securities markets and the ownership of Mtron Common Stock.  If any of the following events actually occur, Mtron’s business, financial condition or results of operations, and the liquidity and trading price of Mtron Common Stock, could be materially adversely affected.  Additional risks and uncertainties that we do not presently know about or currently believe are not material may also adversely affect Mtron’s business, financial condition and results of operations.

Risks Relating to Our Business

We are dependent on a single line of business.

We are engaged only in the design, manufacture and marketing of standard and custom-engineered electronic components that are used primarily for the control of frequency and spectrum of signals in electronic circuits.  Until we diversify our product offerings, we will remain dependent on our single electronic components line of business.

Given our reliance on this single line of business, any decline in demand for this product line or failure to achieve continued market acceptance of existing and new versions of this product line may harm our business and financial condition.  Additionally, unfavorable market conditions affecting this line of business would likely have a disproportionate impact on us in comparison with certain competitors, who have more diversified operations and multiple lines of business.  Should this line of business fail to generate sufficient sales to support ongoing operations, there can be no assurance that we will be able to develop or acquire alternate business lines.

Our operating results vary significantly from period to period.

We experience fluctuations in our operating results.  Some of the principal factors that contribute to these fluctuations include changes in demand for our products; our effectiveness in managing manufacturing processes, costs and inventory; our effectiveness in engineering and qualifying new product designs with our OEM customers and in managing the risks associated with offering those new products into production; changes in the cost and availability of raw materials, which often occur in the electronics manufacturing industry and which affect our margins and our ability to meet delivery schedules; macroeconomic and served industry conditions; and events that may affect our production capabilities, such as labor conditions and political instability.  In addition, due to the prevailing economic climate and competitive differences between the various market segments which we serve, the mix of sales between our communications, networking, aerospace, defense, industrial and instrumentation market segments may affect our operating results from period to period.

Our acquisitions may reduce earnings, require it to obtain additional financing and expose it to additional risks.

Our business strategy includes future acquisitions of operating companies.  Some of these acquisitions may be material.  While we seek to make acquisitions in companies that provide opportunities for growth, our investments or acquisitions may not prove to be successful or, even if successful, may not initially generate income, or may generate income on an irregular basis or over a long time period.  Accordingly, our results of operations may vary significantly on a quarterly basis and from year to year as a result of acquisitions.  Acquisitions will also expose us to the risks of the businesses acquired.  Acquisitions entail numerous risks, including those involving:

13

 

 

---

 

In addition, to the extent that operating businesses are acquired outside the United States or the State of Florida, there will be additional risks related to compliance with foreign regulations and laws including tax laws, labor laws, currency fluctuations and geographic economic conditions.

In addition, there may be significant competition for investments and acquisitions, which could increase the costs associated with the investments or acquisitions.  Substantial costs are incurred in connection with the evaluation of potential acquisition and investment opportunities whether or not the acquisitions or investments are ultimately consummated.  Further, funding of such investments or acquisitions may require additional debt or equity financing, which will subject us to the risks and uncertainties described in these risk factors with respect to those activities in the immediately following risk factors.  If we require additional financing in the future, the financing may not be available when needed or on favorable terms, if at all.

We have a large customer that accounts for a significant portion of our revenues, and the loss of this customer, or decrease in the customer’s demand for our products, could have a material adverse effect on our results of operations.

For the three and six months ended June 30, 2022, our largest customer accounted for $2,111,000, or 29.9% and $4,173,000, or 28.3%, respectively, of our total revenues, compared to $1,704,000, or 26.6% and $3,117,000, or 24.6%, of our total revenues for the three and six months ended June 30, 2021, respectively. In 2021, our largest customer accounted for $7,838,000, or 29.4%, of our total revenues, compared to $7,802,000, or 26.0%, of our total revenues in 2020.  Our second largest customer accounted for $884,000, or 11.3% and $1,803,000, or 12.2%, of our total revenues in the three and six months ended June 30, 2022, respectively, compared to $817,000, or 12.8% and $1,851,000, or 14.6%, of our total revenues in the three and six months ended June 30, 2021, respectively. Our second largest customer accounted for $3,138,000, or 11.8%, of our total revenues in 2021, compared to $5,550,000, or 18.5%, of our total revenues in 2020. The loss of either of these customers, or a decrease in their demand for our products, could have a material adverse effect on our results.

A relatively small number of customers account for a significant portion of our accounts receivable, and the insolvency of any of these customers could have a material adverse impact on our liquidity.

As of June 30, 2022, four of our largest customers accounted for approximately $3,362,000, or 69.5% of accounts receivable. The insolvency of any of these customers could have a material adverse impact on our liquidity.

Our order backlog may not be indicative of future revenues.

Our order backlog is comprised of orders that are subject to specific production release, orders under written contracts, oral and written orders from customers with which we have had long-standing relationships and written purchase orders from sales representatives.  Our customers may order products from multiple sources to ensure timely delivery when backlog is particularly long and may cancel or defer orders without significant penalty.  They also may cancel orders when business is weak and inventories are excessive.  As a result, we cannot provide assurances as to the portion of backlog orders to be filled in a given year, and our order backlog as of any particular date may not be representative of actual revenues for any subsequent period.

Our future rate of growth and profitability are highly dependent on the development and growth of the communications, networking, aerospace, defense, instrumentation and industrial markets, which are cyclical.

In 2021, the majority of our revenues were derived from sales to manufacturers of equipment for the defense, aerospace, instrumentation and industrial markets for frequency and spectrum control devices, including indirect sales through distributors and contract manufacturers.  During 2022 and 2023, we expect a significant portion of our revenues to continue to be derived from sales to these manufacturers.  Often OEMs and other service providers within these markets have experienced periods of capacity shortage and periods of excess capacity, as well as periods of either high or low demand for their products.  In periods of excess capacity or low demand, purchases of capital equipment may be curtailed, including equipment that incorporates our products.  A reduction in demand for the manufacture and purchase of equipment for these markets, whether due to cyclical, macroeconomic or other factors, or due to our reduced ability to compete based on cost or technical factors, could substantially reduce our net sales and operating results and adversely affect our financial condition.  Moreover, if these markets fail to grow as expected, we may be unable to maintain or grow our revenues.  The multiple variables which affect the communications, networking, aerospace, defense, instrumentation and industrial markets for our products, as well as the number of parties involved in the supply chain and manufacturing process, can impact inventory levels and lead to supply chain inefficiencies.  As a result of these complexities, we have limited visibility to forecast revenue projections accurately for the near and medium-term timeframes.

14

 

 

---

 

The market share of our customers in the communications, networking, aerospace, defense, instrumentation and industrial markets may change over time, reducing the potential value of our relationships with our existing customer base.

We have developed long-term relationships with our existing customers, including pricing contracts, custom designs and approved vendor status.  If these customers lose market share to other equipment manufacturers in the communications, networking, aerospace, defense, instrumentation and industrial markets with whom we do not have similar relationships, our ability to maintain revenue, margin or operating performance may be adversely affected.

If we are unable to introduce innovative products, demand for our products may decrease.

Our future operating results are dependent on our ability to develop, introduce and market innovative products continually, to modify existing products, to respond to technological change and to customize some of our products to meet customer requirements.  There are numerous risks inherent in this process, including the risks that we will be unable to anticipate the direction of technological change or that it will be unable to develop and market new products and applications in a timely or cost-effective manner to satisfy customer demand.

Our markets are highly competitive, and we may lose business to larger and better-financed competitors.

Our markets are highly competitive worldwide, with low transportation costs and few import barriers.  We compete principally on the basis of product quality and reliability, availability, customer service, technological innovation, timely delivery and price.  Within the industries in which we compete, competition has become increasingly concentrated and global in recent years.

Many of our major competitors, some of which are larger than us, and potential competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing and customer support capabilities.  If we are unable to successfully compete against current and future competitors, our operating results will be adversely affected.

Our success depends on our ability to retain key management and technical personnel and attracting, retaining, and training new technical personnel.

Our future growth and success will depend in large part upon our ability to recruit highly-skilled technical personnel, including engineers, and to retain our existing management and technical personnel.  The labor markets in which we operate are highly competitive and some of our operations are not located in highly populated areas.  As a result, we may not be able to recruit and retain key personnel.  Our failure to hire, retain or adequately train key personnel could have a negative impact on our performance.

We purchase certain key components and raw materials from single or limited sources and could lose sales if these sources fail to fulfill our needs for any reason, including the inability to obtain these key components or raw materials due to the COVID-19 outbreak.

If single-source components or key raw materials were to become unavailable on satisfactory terms, and we could not obtain comparable replacement components or raw materials from other sources in a timely manner, our business, results of operations and financial condition could be harmed.  On occasion, one or more of the components used in our products have become unavailable, resulting in unanticipated redesign and related delays in shipments.  The COVID-19 outbreak has caused a global pandemic that has disrupted supply chains and the ability to obtain components and raw materials around the world for all companies, including Mtron.  We cannot give assurance that we will be able to obtain the necessary components and raw materials necessary to conduct our business during the COVID-19 pandemic, and we also cannot give assurance that similar delays will not occur in the future.  In addition, our suppliers may be impacted by compliance with environmental regulations including RoHS and Waste Electrical and Electronic Equipment (“WEEE”), which could disrupt the supply of components or raw materials or cause additional costs for us to implement new components or raw materials into our manufacturing processes.

As a supplier to U.S. Government defense contractors, we are subject to a number of procurement regulations and other requirements and could be adversely affected by changes in regulations or any negative findings from a U.S. Government audit or investigation.

A number of our customers are U.S. Government contractors.  As one of their suppliers, we must comply with significant procurement regulations and other requirements.  Under applicable federal regulations for defense contractors, we are required to

15

 

 

---

 

comply with the Cybersecurity Maturity Model Certification (“CMMC”) program in the next several years and other similar cybersecurity requirements.  We also maintain registration under the International Traffic in Arms Regulations for all of our production facilities.  One of those production facilities must comply with additional requirements and regulations for our production processes and for selected personnel in order to maintain the security of classified information.  These requirements, although customary within these markets, increase our performance and compliance costs.  If any of these various requirements change, our costs of complying with them could increase and reduce our operating margins.  To the extent that we are unable to comply with the CMMC or other requirements, our business with the Department of Defense or our prime customers could be at risk.

We operate in a highly regulated environment and are routinely audited and reviewed by the U.S. Government and its agencies such as the Defense Contract Audit Agency and Defense Contract Management Agency.  These agencies review our performance under our contracts, our cost structure and our compliance with applicable laws, regulations, and standards, as well as the adequacy of, and our compliance with, our internal control systems and policies.  Systems that are subject to review include our purchasing systems, billing systems, property management and control systems, cost estimating systems, compensation systems and management information systems.

Any costs found to be improperly allocated to a specific contract will not be reimbursed or must be refunded if already reimbursed.  If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business as a supplier to contractors who sell products and services to the U.S. Government.  In addition, our reputation could be adversely affected if allegations of impropriety were made against us.

From time to time, we may also be subject to U.S. Government investigations relating to our or our customers’ operations and products, and we and our customers are expected to perform in compliance with a vast array of federal laws, including the Truth in Negotiations Act, the False Claims Act, the International Traffic in Arms Regulations promulgated under the Arms Export Control Act, and the Foreign Corrupt Practices Act.  We or our customers may be subject to reductions of the value of contracts, contract modifications or termination, and the assessment of penalties and fines, which could negatively impact our results of operations and financial condition, or result in a diminution in revenue from our customers, if we or our customers are found to have violated the law or are indicted or convicted for violations of federal laws related to government security regulations, employment practices or protection of the environment, or are found not to have acted responsibly as defined by the law.  Such convictions could also result in suspension or debarment from serving as a supplier to government contractors for some period of time.  Such convictions or actions could have a material adverse effect on us and our operating results.  The costs of cooperating or complying with such audits or investigations may also adversely impact our financial results.

Our products are complex and may contain errors or design flaws, which could be costly to correct.

When we release new products, or new versions of existing products, they may contain undetected or unresolved errors or defects.  The vast majority of our products are custom designed for requirements of specific OEM systems.  The expected business life of these products ranges from less than one year to more than 10 years depending on the application.  Some of the customizations are modest changes to existing product designs while others are major product redesigns or new product platforms.

Despite testing, errors or defects may be found in new products or upgrades after the commencement of commercial shipments.  Undetected errors and design flaws have occurred in the past and could occur in the future.  These errors could result in delays, loss of market acceptance and sales, diversion of development resources, damage to our reputation, product liability claims and legal action by our customers and third parties, failure to attract new customers and increased service costs.

Communications and network infrastructure equipment manufacturers increasingly rely upon contract manufacturers, thereby diminishing our ability to sell our products directly to those equipment manufacturers.

There is a continuing trend among communications and network infrastructure equipment manufacturers to outsource the manufacturing of their equipment or components.  As a result, our ability to persuade these OEMs to utilize our products in customer designs could be reduced and, in the absence of a manufacturer’s specification of our products, the prices that we can charge for them may be subject to greater competition.

16

 

 

---

 

Future changes in our environmental liability and compliance obligations may increase costs and decrease profitability.

Our present and past manufacturing operations, products, and/or product packaging are subject to environmental laws and regulations governing air emissions, wastewater discharges, and the handling, disposal and remediation of hazardous substances, wastes and other chemicals.  In addition, more stringent environmental regulations may be enacted in the future, and we cannot presently determine the modifications, if any, in our operations that any future regulations might require, or the cost of compliance that would be associated with such regulations.

Environmental laws and regulations may cause us to change our manufacturing processes, redesign some of our products, and change components to eliminate some substances in our products in order to be able to continue to offer them for sale.

We have significant international operations and sales to customers outside of the United States that subject us to certain business, economic and political risks.

We have office and manufacturing space in Noida, India, and a sales office in Hong Kong.  Additionally, foreign revenues (primarily relating to Malaysia) accounted for 26.8% of our combined revenues for the six months ended June 30, 2022 and 21.5% of our combined revenues for the 2021 year.  We anticipate that sales to customers located outside of the United States will continue to be a significant part of our revenues for the foreseeable future.  Our international operations and sales to customers outside of the United States subject our operating results and financial condition to certain business, economic, political, health, regulatory and other risks, including but not limited to:

Additionally, to date, very few of our international revenue and cost obligations have been denominated in foreign currencies.  As a result, changes in the value of the United States dollar relative to foreign currencies may affect our competitiveness in foreign markets.  We do not currently engage in foreign currency hedging activities, but may do so in the future to the extent that we incur a significant amount of foreign-currency denominated assets or liabilities.

We rely on information technology systems to conduct our business, and disruption, failure or security breaches of these systems could adversely affect our business and results of operations.

We rely on information technology (“IT”) systems in order to achieve our business objectives.  We also rely upon industry accepted security measures and technology to securely maintain confidential information maintained on our IT systems.  However, our portfolio of hardware and software products, solutions and services and our enterprise IT systems may be vulnerable to damage or disruption caused by circumstances beyond our control such as catastrophic events, power outages, natural disasters, computer system or network failures, computer viruses, cyber-attacks or other malicious software programs.  The failure or disruption of our IT systems to perform as anticipated for any reason could disrupt our business and result in decreased performance, significant remediation costs, transaction errors, loss of data, processing inefficiencies, downtime, litigation and the loss of suppliers or customers.  A significant disruption or failure could have a material adverse effect on our business operations, financial performance and financial condition.

17

 

 

---

 

Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources.  These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption.  The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to customer relationships.  As our reliance on technology increases, so will the risks posed to our information systems, both internal and those we outsource.  There is no guarantee that any processes, procedures and internal controls we have implemented or will implement will prevent cyber intrusions, which could have a negative impact on our financial results, operations, business relationships or confidential information.

If we fail to correct any material weakness that our independent registered public accounting firm identifies in our internal control over financial reporting or otherwise fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports and the price of our common stock may decline.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on our system of internal control.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.  We are required to comply with the Sarbanes-Oxley Act and other rules that govern public companies.

If we identify material weaknesses in our internal control over financial reporting in the future, if we cannot comply with the requirements of the Sarbanes-Oxley Act in a timely manner or attest that our internal control over financial reporting is effective, or if our independent registered public accounting firm cannot express an opinion as to the effectiveness of our internal control over financial reporting when required, we may not be able to report our financial results accurately and timely.  As a result, investors, counterparties and consumers may lose confidence in the accuracy and completeness of our financial reports.  Accordingly, access to capital markets and perceptions of our creditworthiness could be adversely affected, and the market price of our common stock could decline.  In addition, we could become subject to investigations by the stock exchange on which our securities are listed, the Securities and Exchange Commission (the “SEC”) or other regulatory authorities, which could require additional financial and management resources.  These events could have a material and adverse effect on our business, operating results, financial condition and prospects.

The ongoing effects of the COVID-19 pandemic and associated global economic disruption and uncertainty have affected, and may further affect, our business, results of operations and financial condition.

Our results of operations are affected by certain economic factors, including the downturn in the avionics market and closure of our facilities located in Noida, India on March 23, 2020.  This facility resumed limited operations on May 7, 2020 and was in full operation at the end of June 2020.  The broader implications of the COVID-19 pandemic on our results of operations and overall financial performance remain uncertain as well as the extent to which it will affect our revenues and earnings.  Although we believe that after the spin-off we will have sufficient liquidity and capital resources to effectively continue operations for the foreseeable future, continued deterioration of worldwide credit and financial markets may limit our ability to raise capital and financing may not be available to us in sufficient amounts, on acceptable terms, or at all.  If we are unable to access sufficient capital on acceptable terms, our business could be adversely impacted.

In an effort to protect the health and safety of our employees, we implemented various measures to reduce the impact of COVID-19 across our organization, while also working to maintain business continuity.  Consistent with government guidelines and mandates, these initiatives included the adoption of social distancing policies, work-at-home arrangements, and suspending employee travel.  Currently, while a few of our administrative employees are working remotely from home in an effort to reduce the spread of the virus, most of our employees are unable to work from home as we are primarily a manufacturer of products for the defense and aerospace industries and our employees’ work must be performed within a controlled environment.  A decline in the health and safety of our employees, including key employees, or material disruptions to their ability to work either remotely or at one of our manufacturing facilities, could negatively affect our ability to operate our business normally and have a material adverse impact on our results of operations or financial condition.

18

 

 

---

 

To the extent that COVID-19 continues to spread and affect the employee base or operations of our materials providers, disruptions in the provision of, or the inability to provide, materials to us could negatively impact our business operations.

We may issue additional securities and incur additional indebtedness at our company or our subsidiaries.

We may in the future seek to raise funds through the issuance of debt or equity securities.  There is generally no restriction on our ability to issue debt or equity securities, which are pari passu or have a preference over its common stock.  After the spin-off, authorized but unissued shares of our capital stock will be available for issuance from time to time at the discretion of our board of directors, and any such issuance may be dilutive to our stockholders.

Substantial sales of Mtron Common Stock could adversely affect the market prices of such securities.

Substantial sales of Mtron Common Stock, including sales of shares by significant stockholders and management, could adversely affect the market prices of such shares.  Management has in the past and may in the future enter into Rule 10b5-1 plans pursuant to which a significant number of shares are sold into the open market.

Risks Relating to the Spin-Off

We may be unable to achieve some or all of the expected benefits of the spin-off, and the spin-off may adversely affect our business.

As a new, publicly-traded company, we may be more susceptible to market fluctuations and other adverse events attendant to our separation from the Company.  Our performance may not meet expectations for a variety of reasons.  As a subsidiary of the Company, we enjoyed certain benefits, including economies of scope and scale in costs, employees and business relationships.  These benefits may not be as readily achievable as a stand-alone company.  There can be no assurance that the spin-off will not adversely affect our business.

The distribution of Mtron Common Stock may not qualify for tax-free treatment.

There is a risk that the distribution may not qualify for tax-free treatment and, accordingly, will be a taxable transaction to the Company’s stockholders.  While the distribution is intended to be tax-free under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”), and while we believe that the Company’s stockholders should not recognize gain or loss as a result of the distribution and that no amount should be included in their income as a result of the distribution for U.S. federal income tax purposes, the Company has not obtained, and does not expect to obtain, a tax opinion with respect to the tax consequences of the spin-off.  Furthermore, neither the Company nor Mtron has applied or will apply for a private letter ruling from the Internal Revenue Service (the “IRS”) with respect to the tax consequences of the distribution.  Accordingly, there can be no assurance that the IRS or another taxing authority will not assert that the distribution is taxable to the Company, Mtron or the Company’s stockholders.  If the distribution is determined to be taxable for U.S. federal income tax purposes, the receipt of Mtron Common Stock in the spin-off is expected to be treated as a distribution of property in an amount equal to the fair market value of the stock received.  We believe that a reasonable approach to determine the fair market value of the shares of Mtron Common Stock received would be to use the volume-weighted average price of Mtron Common Stock on the first full trading day following the distribution.  In such circumstances, the distribution of Mtron Common Stock in the spin-off would be treated as ordinary dividend income to the extent considered paid out of the Company’s current or accumulated earnings and profits (as determined under U.S. federal income tax principles).  Distributions in excess of the Company’s current year and accumulated earnings and profits will be treated as a non-taxable return of capital, which reduces basis, to the extent of the holder’s basis in its shares of the Company’s common stock, as applicable, and thereafter as capital gain.  The amount of those earnings and profits is not determinable at this time because it will depend on the Company’s income for the entire tax year in which the distribution occurs.  For more information regarding the potential U.S. federal income tax consequences to you of the distribution, see the section entitled “The Spin-Off—Material U.S. Federal Income Tax Consequences of the Spin-Off.”

Our ability to meet our capital needs may be harmed by the loss of financial support from the Company, and we may not be able to obtain funds necessary to operate our business.

Our ability to meet our capital needs, which turn on our financial condition and future prospects, may be harmed after the completion of the spin-off, and we will not be able to access financial support from the Company following the spin-off.  To the extent

19

 

 

---

 

we seek funds through accessing equity or debt capital markets, as a standalone company, the cost of financing will depend on many factors, among other things, such as our performance and financial market conditions generally.  Accordingly, we may not be able to obtain financing or otherwise raise funds necessary to operate our business on favorable terms, or at all.  If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay or scale back our acquisition activity and planned capital expenditures, which could adversely impact our business and prospects.  In addition, to the extent debt financing, if available, is obtained, we may be subject to operating and financial covenants that may restrict our operations and if we cannot generate sufficient cash flow from operations to meet future debt payment obligations, we may be required to attempt to restructure or refinance such debt, raise additional capital or take other actions such as selling assets, or reducing or delaying capital expenditures.  There is no assurance that we will be able to effect any such actions or do so on satisfactory terms, if at all, or that such actions would be permitted by the terms of our indebtedness.  Further, to the extent that we raise additional funds by issuing equity securities, our stockholders would experience dilution, which may be significant and could cause the market price of Mtron Common Stock to decline.

Mtron may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as a separate, publicly traded company, and we may experience increased costs after the spin-off.

Following the spin-off, the Company will have no obligation to provide us with assistance other than the obligations and services contained in the agreements between the Company and Mtron relating to the spin-off, including the Separation and Distribution Agreement and other agreements described under “The Spin-Off – Relationship Between Mtron and the Company.” These services do not include every service that we have received from the Company in the past, and the Company is only obligated to provide the services for limited periods following completion of the spin-off.  The agreements relating to such services and to the spin-off were agreed to prior to the spin-off, at a time when our business was still operated as part of the Company’s organization, and we did not have an independent board of directors or management team representing our interests with respect to such agreements.

Following the spin-off and the expiration of the aforementioned agreements, we will need to provide internally or obtain from unaffiliated third parties the services we will no longer receive from the Company.  These services may include, without limitation, legal, accounting, information technology, human resources and other infrastructure support, the effective and appropriate performance of which may be critical to our operations. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those received from the Company.  We may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently, or may incur additional costs that could adversely affect us.  If we fail to obtain the quality of services necessary to operate effectively or incur greater costs in obtaining these services, our business, financial condition and results of operations may be adversely affected.

As a public company, we will be subject to the reporting requirements of the Exchange Act and the requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).  These requirements may place a strain on our systems and resources.  The Exchange Act requires that we file reports and statements with the SEC, including annual, quarterly and current reports.  Under the Sarbanes-Oxley Act, we must maintain effective disclosure controls and procedures and internal control over financial reporting, which requires significant resources and management oversight.  We intend to implement additional procedures and processes to address the standards and requirements applicable to public companies, but these procedures may not be successful and the costs associated with compliance may be greater than anticipated.

We do not have an operating history as a standalone company apart from the Company’s organization, and our historical and pro forma financial information may not be a reliable indicator of our future results.

The historical financial information Mtron has included in this information statement has been derived from the Company’s consolidated financial statements and accounting records and does not necessarily reflect what our financial position, results of operations and cash flows would have been had Mtron been a separate, stand-alone entity during the periods presented.  The Company did not account for Mtron, and Mtron was not operated, as a separate, stand-alone company for the periods presented.  Actual costs that may have been incurred if Mtron had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees, and strategic decisions made in areas such as information technology and infrastructure, and materiality thresholds would have been significantly lower.  In addition, the historical information may not be indicative of what our results of operations, financial position and cash flows will be in the future.  For example, following the spin-off, changes may occur in our cost structure, debt financing and interest expense, funding and operations, including changes in our tax structure, and we will incur increased costs associated with being a stand-alone public company.

20

 

 

---

 

Additionally, in preparing the unaudited pro forma combined financial statements contained in this information statement, Mtron based the pro forma adjustments on available information and assumptions that Mtron believes are reasonable and factually supportable; however, the assumptions may prove not to be accurate.  Also, our unaudited pro forma combined financial statements do not give effect to various ongoing additional costs Mtron may incur in connection with being a stand-alone public company.  Accordingly, the unaudited pro forma combined financial statements do not reflect what our financial condition, results of operations or cash flows would have been as a stand-alone public company and is not necessarily indicative of our future financial condition or results of operations.

The spin-off could give rise to disputes or other unfavorable effects, which could have a material adverse effect on our business, financial position and results of operations.

Disputes with third parties could arise out of the distribution, and we could experience unfavorable reactions to the distribution from employees, investors, or other interested parties.  These disputes and reactions could have a material adverse effect on our business, financial position, and results of operations.  In addition, following the spin-off, disputes between Mtron and the Company could arise in connection with the Separation and Distribution Agreement and other agreements to be entered into between Mtron and the Company in connection with the spin-off as described under “The Spin-Off – Relationship Between Mtron and the Company.”

We may have been able to receive better terms from unaffiliated third parties than the terms provided in our agreements with the Company.

The agreements related to our separation from the Company were negotiated in the context of our separation from the Company while we were still a wholly-owned subsidiary.  Accordingly, they may not reflect terms that would have been reached between unaffiliated parties.  The terms of the agreements we negotiated in the context of the separation related to, among other things, indemnities and other obligations between the Company and Mtron.  Had these agreements been negotiated with unaffiliated third parties, they might have been more favorable to Mtron.

Our potential indemnification obligations pursuant to the Separation and Distribution Agreement could have material adverse effects.

Under the Separation and Distribution Agreement, we have an obligation to indemnify the Company for liabilities associated with our business and any breach of our obligations under the Separation and Distribution Agreement and other agreements to be entered into between Mtron and the Company in connection with the spin-off as described under “The Spin-Off – Relationship between Mtron and the Company.” The costs associated with any such indemnification could be significant and have a material adverse effect on our results and financial condition.

Our current or prospective customers, suppliers or other companies with whom we conduct business may need assurances that our financial condition on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them.

Our customers, suppliers or other companies with whom we conduct business may need assurances that our financial condition on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them.  If any of them are not satisfied with our financial stability and cease doing business with Mtron, our business, financial condition and results of operations could be materially adversely affected.

After the separation, certain of Mtron’s directors and officers may have actual or potential conflicts of interest because of their positions or relationships with the Company.

After the separation, Marc J. Gabelli will serve as Mtron’s non-executive chairman of the board and will also serve as chairman of the board and chief executive officer of the Company, Michael J. Ferrantino will serve as Mtron’s chief executive officer and as a director on our board and also as a director of the Company, and James W. Tivy will serve as Mtron’s chief financial officer and also as chief accounting officer of the Company.  Such dual roles could create, or appear to create, potential conflicts of interest when the Company and our officers and directors face decisions that could have different implications for the two companies.

In addition, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between the Company and Mtron regarding the terms of the agreements governing the separation and the relationship thereafter between the

21

 

 

---

 

companies.  The Company’s executive officers and other personnel who serve as directors or executive management of Mtron may interpret these agreements in their capacity as the Company’s employees in a manner that would adversely affect the business of Mtron.

The aggregate post-distribution value of the Mtron Common Stock and the Company’s common stock may not equal or exceed the pre-spin-off value of the Company’s common stock.

After the spin-off, the Company’s common stock will continue to be listed and traded on the NYSE American under the symbol “LGL.” The Mtron Common Stock is expected to be listed on the NYSE American under the symbol “MPTI.” We cannot assure you that the combined value of the Company’s common stock and Mtron Common Stock after the spin-off will be equal to or greater than the value of the Company’s common stock prior to the spin-off.  Until the market has fully evaluated the business of the Company without the business of Mtron, the value of the Company’s common stock may fluctuate significantly.  Similarly, until the market has fully evaluated the business of Mtron, the value of Mtron Common Stock may fluctuate significantly.

Risks Relating to Mtron Common Stock

There is no existing market for Mtron Common Stock and an active trading market may not develop or be sustained after the spin-off.  If the price of Mtron Common Stock fluctuates significantly following the spin-off, stockholders could incur substantial loss of their investment.

There currently is no public market for Mtron Common Stock and there can be no assurance that an active trading market will develop as a result of the spin-off or be sustained in the future.  The lack of an active market may make it more difficult for you to sell your stock and could lead to the price of the stock being depressed or more volatile.  The price at which Mtron Common Stock may trade after the spin-off cannot be predicted.  The price of Mtron Common Stock could fluctuate widely in response to:

In addition, the stock market has at times experienced extreme price and volume fluctuations that have significantly affected the quoted prices of securities.  The changes often appear to occur without regard to specific operating performance.  The price of Mtron Common Stock could fluctuate based upon factors that have little or nothing to do with our business or our performance, and these fluctuations could materially reduce the price of Mtron Common Stock.

Substantial sales of Mtron Common Stock may occur in connection with the spin-off, which could cause the price of the common stock to decline.

Other than stockholders that are affiliates of the Company, stockholders of the Company receiving shares of Mtron Common Stock in the distribution generally may sell those shares immediately in the public market.  The Company’s stockholders may decide to sell the shares received in the distribution for any reason, including if, among other things, if Mtron Common Stock does not fit their investment objectives.  Sales of significant amounts of Mtron Common Stock or a perception in the market that such sales will occur may reduce the market price of the stock.

Mario J. Gabelli’s and Marc J. Gabelli’s stock ownership position may adversely affect the market price of Mtron Common Stock.

Mario J. Gabelli and Marc J. Gabelli will have the same beneficial ownership and voting interest in Mtron immediately following the spin-off as they have with respect to the Company immediately prior to the spin-off; they will beneficially own 521,306 and 422,441 shares, respectively, which in the aggregate represents 35.0% of the total outstanding shares of the Company’s common stock.  The Company’s officers, directors and 10% or greater stockholders control approximately 39.0% of the voting power of the outstanding shares of the Company’ common stock.  These Company stockholders will have the same voting power with respect to

22

 

 

---

 

Mtron and will have a significant influence in the election of directors and the vote on any other matter presented for approval by our stockholders.  This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of Mtron Common Stock.  This concentration of ownership may not be in the best interests of all of our stockholders.

Provisions in our corporate charter documents and under Delaware law could make an acquisition of the Company more difficult, which acquisition may be beneficial to our stockholders.

Provisions in our certificate of incorporation and by-laws, as well as provisions of the Delaware General Corporation Law (“DGCL”), may discourage, delay or prevent a merger, acquisition or other change in control of the Company, even if such a change in control would be beneficial to our stockholders.  These provisions include prohibiting our stockholders from fixing the number of directors and establishing advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors.

Additionally, Section 203 of the DGCL prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with Mtron for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.  Mtron has not opted out of the restrictions under Section 203, as permitted under DGCL.

Our certificate of incorporation will contain an exclusive forum provision, which could impair the ability of stockholders to obtain a favorable judicial forum for certain disputes with us or our directors, officers or other employees and be cost-prohibitive to stockholders.

Our certificate of incorporation will contain an exclusive forum provision which provides that, unless our board of directors consents to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery of the State of Delaware lacks jurisdiction over an action or proceeding, then another court of the State of Delaware or, if no court of the State of Delaware has jurisdiction, then the United States District Court for the District of Delaware) will be the sole and exclusive forum for “Covered Proceedings,” which include: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees, agents and stockholders to us or our stockholders; (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or bylaws; and (iv) any action asserting a claim governed by the internal affairs doctrine of the State of Delaware.  Further, unless we select or consent to the selection of an alternative forum, to the fullest extent permitted by law,   the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Our exclusive forum provision does not apply to suits brought to enforce any liability or duty created by the Exchange Act, and investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder.  The exclusive forum provision will also provide that if any Covered Proceeding is filed in a court other than a court located within the State of Delaware in the name of any stockholder, then such stockholder shall be deemed to have consented to (a) the personal jurisdiction of the state and federal courts located within the State of Delaware in connection with any action brought in any such court to enforce the exclusive forum provision and (b) having service of process made upon such stockholder in any such enforcement action by service upon such stockholder’s counsel in the action as agent for such stockholder.  Notwithstanding the foregoing, stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder.

The exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees or be cost-prohibitive to stockholders, which may discourage such lawsuits against us and our directors, officers and other employees.  While the Delaware courts have determined that such choice of forum provisions are facially valid, there is uncertainty regarding whether a court would enforce the exclusive forum provision and a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum. In such instance, we would expect to assert vigorously the validity and enforceability of the exclusive forum provisions of our certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. If a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, Mtron may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our financial condition and operating results.

23

 

 

---

 

We do not plan to pay dividends on our common stock.

Our dividend policy will be established by our board of directors based on our financial condition, results of operations and capital requirements, as well as other business considerations that the board considers relevant.  Further, the terms of our indebtedness may limit or prohibit the payments of dividends.  We do not currently anticipate paying any cash dividends for the foreseeable future.

Utilizing the reduced disclosure requirements applicable to Mtron may make Mtron Common Stock less attractive to investors.

Mtron qualifies as an “emerging growth company” and is therefore eligible to utilize certain reduced reporting and other requirements that are otherwise applicable generally to public companies.  Pursuant to these reduced disclosure requirements, Mtron is not required to, among other things, provide certain disclosures regarding executive compensation, hold stockholder advisory votes on executive compensation or obtain stockholder approval of any golden parachute payments, and Mtron has reduced financial disclosure obligations.  Mtron may remain an emerging growth company for up to five full fiscal years following the spin-off.  Mtron would cease to be an emerging growth company, and, therefore, become ineligible to rely on the above exemptions, if it (a) has more than $1.07 billion in annual revenue in a fiscal year, (b) issue more than $1 billion of non-convertible debt over a three-year period or (c) become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur after: (i) we have filed at least one annual report; (ii) we have been an SEC-reporting company for at least 12 months; and (iii) the market value of Mtron Common Stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter (June 30).  We cannot predict if investors will find Mtron Common Stock less attractive because we may rely on these exemptions.

Mtron also qualifies as a “smaller reporting company” under the Exchange Act in which case Mtron would be eligible to utilize the reduced disclosure requirements available to smaller reporting companies even after Mtron ceases to be an emerging growth company.  The reduced disclosure requirements available to smaller reporting companies are similar to those available to emerging growth companies, including reduced financial and executive compensation disclosures.  Under current SEC rules, Mtron will be a smaller reporting company if, as of the end of the third fiscal quarter following the completion of the spin-off (the quarter ending June 30, 2023 assuming the spin-off is completed prior to such date), the total market value of our common equity securities held by non-affiliates is less than $200 million.

Mtron intends to utilize the reduced reporting requirements and available exemptions for so long as we are permitted to do so.  Investors may find Mtron Common Stock to be less attractive as a result of our utilization of the reduced disclosure requirements and exemptions, which may have a material, adverse effect on the trading market and market price of Mtron Common Stock.

24

 

 

---

 

 

Cautionary Statement Regarding Forward-Looking Statements

This information statement and other materials that Mtron has filed, or will file, with the SEC contain, or will contain, “forward-looking statements.” Forward-looking statements are those that do not relate strictly to historical or current facts and can be identified by use of words such as “anticipates,” “estimates,” “expects,” “intends,” “plans,” “believes,” “will,” “should,” “would,” “may,” “could” or the negative of these terms or similar expressions or future or conditional verbs.  Forward-looking statements include, among others, statements relating to our future financial performance, business prospects and strategy, anticipated financial position, liquidity and capital needs, market potential, and other events or developments that Mtron expects or anticipates will occur in the future and statements expressing general views about future operating results or conditions.  These statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are impossible or difficult to predict.  Our actual results may differ materially from those expressed in, or implied by, the forward-looking statements as a result of various factors, including, without limitation, those set forth below.

With respect to Mtron generally, the various factors include, but are not limited to:

25

 

 

---

 

Risks and uncertainties related to the spin-off include, but are not limited to:

In addition to the foregoing, reference is made to the other risks and uncertainties inherent to our business and activities, including those discussed under “Risk Factors” and elsewhere in this information statement.  These and other factors disclosed in this information statement are not necessarily all of the important factors that could cause our actual results to differ materially from those expressed in or implied by any of the forward-looking statements.  Other unknown or unpredictable factors could cause our actual results to differ materially from those expressed in or implied by any of the forward-looking statements.  Given these uncertainties, you are cautioned not to place undue reliance on forward-looking statements.  These statements should be considered only after carefully reading this entire information statement and in conjunction with the other information contained herein.

The forward-looking statements contained in this information statement are made only as of the date of this information statement.  Except to the extent required by law, we do not undertake, and specifically disclaim any obligation, to update any forward-looking statements or to publicly announce the results of any revisions to any of such statements, including to reflect future events or developments.  In addition, past performance may not be indicative of future results, and comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, and all such information should only be viewed as historical data.

You should read this information statement and the materials that we reference in this information statement and have filed with the SEC as exhibits to the registration statement on Form 10, of which this information statement is a part, with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.  We qualify all forward-looking statements by these cautionary statements.

26

 

 

---

 

 

The Spin-Off

Reasons for the Spin-off

The Company’s Board of Directors has determined that the separation of Mtron from the Company is in the best interests of the Company’s stockholders.  The Company’s Board of Directors believes that the separation will, among other things:

Mechanics of the Spin-off

The Company is the owner of all of the issued and outstanding shares of Mtron Common Stock.  The spin-off will be effected through the pro rata distribution by the Company to its stockholders of 100% of the shares of Mtron Common Stock held by the Company.  As a stockholder of the Company, you will receive one-half share of Mtron Common Stock for each share of the Company’s common stock held of record by you as of 5:00 P.M., Eastern time, on September 30, 2022 (such time and date being referred to as the “record date” for the distribution).  The spin-off will not impact your holdings of the Company’s common stock and, accordingly, your proportionate interest in the Company will not change as a result of the spin-off.  The distribution is intended to be tax-free for U.S. federal income tax purposes.  See “Material U.S. Federal Income Tax Consequences of the Spin-Off” below.

Based on the number of shares of the Company’s common stock expected outstanding as of the record date, we expect that 2,695,235 shares of Mtron Common Stock will be distributed in the spin-off.  However, the actual number of shares of Mtron Common Stock to be distributed in the spin-off will be determined based on the actual number of shares of the Company’s common stock outstanding as of the record date.

On or before the distribution date, the Company will release the shares of Mtron Common Stock to the distribution agent to distribute to the Company’s stockholders.  The shares will be distributed in book-entry form, which means that no physical share certificates will be issued.  We expect that it may take the distribution agent up to one week following the distribution date to electronically issue shares of Mtron Common Stock to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form.

No stockholder will be required to pay any consideration, exchange or surrender its existing shares of the Company’s common stock or take any other action to receive their shares of Mtron Common Stock.  However, completion of the spin-off is conditioned upon certain conditions described below.

Relationship between Mtron and the Company

The separation of businesses of Mtron and the Company in connection with the spin-off and the relationship between Mtron and the Company following the spin-off will be governed by a Separation and Distribution Agreement, a Transitional Administrative and Management Services Agreement, and a Tax Indemnity and Sharing Agreement, each as entered into between Mtron and the Company in connection with the spin-off.  These agreements are intended to facilitate the separation of businesses between the Company and Mtron in connection with the spin-off and the operation of Mtron and the Company as separate companies after the spin-off.  The following is a summary of the Separation and Distribution Agreement and Transitional Administrative and Management Services Agreement.  The summaries are not complete and are qualified in their entirety by reference to the actual agreements or

27

 

 

---

 

instruments, copies of which are filed as exhibits to the registration statement on Form 10, of which this information statement forms a part.  We encourage you to read the full text of these agreements.

Separation and Distribution Agreement

The Separation and Distribution Agreement (the “Separation Agreement”) will contain the key provisions relating to the separation of our business from that of the Company and the distribution of the Mtron Common Stock. The Separation Agreement will identify the assets to be transferred, liabilities to be assumed and contracts to be assigned to us by the Company and by us to the Company in the spin‑off and describe when and how these transfers, assumptions and assignments will occur. The Separation Agreement will also include procedures by which the Company and we will become separate and independent companies. In addition, we will enter into certain ancillary agreements with the Company governing various interim and ongoing relationships between the Company and us following the distribution date. These ancillary agreements include a Transitional Administrative and Management Services Agreement and several other agreements with the Company.

We and the Company intend to execute the Separation Agreement and the ancillary agreements on or before the distribution date; however, they will not be effective until the distribution date. The Separation Agreement may be amended if both parties agree in writing.

Recapitalization and Separation

The Separation Agreement will provide that, subject to the terms and conditions contained in the Separation Agreement and before the distribution,

Distribution of Shares

The Company will distribute to its stockholders all the shares of Mtron Common Stock that it owns on the terms described in this information statement. The Company’s obligation to consummate the distribution is subject to the following conditions:

Mutual Release

As of the time of the distribution, each party will release the other party and their respective affiliates and their directors, officers, employees and agents from all claims, demands and liabilities, in law and in equity, against such other party, which such

28

 

 

---

 

releasing party has or may have had relating to events, circumstances or actions taken by such other party prior to the distribution. This release does not apply to claims arising from the Separation Agreement.

Indemnification

From and after the distribution, the Company will indemnify Mtron and its directors, officers, employees, agents and affiliates (collectively, the “Mtron indemnitees”) against all losses, liabilities and damages incurred or suffered by any of the Mtron indemnitees arising out of:

From and after the distribution, Mtron will indemnify the Company and its directors, officers, employees, agents and affiliates (collectively, “Company indemnitees”) against all losses, liabilities and damages incurred or suffered by any of the Company indemnitees arising out of:

Further Assurances

Each of the parties will agree to cooperate with the other and use commercially reasonable efforts to take or to cause to be taken all actions, and to do, or to cause to be done, all things reasonably necessary under applicable law or contractual obligations to consummate and make effective the transactions contemplated by the Separation Agreement and the ancillary agreements.

Other Matters

Other matters governed by the Separation Agreement include, without limitation, access to financial and other records and information, confidentiality and resolution of disputes between the parties relating to the Separation Agreement, the ancillary agreements and the agreements and transactions contemplated thereby.

29

 

 

---

 

Transitional Administrative and Management Services Agreement

Concurrently with our separation from the Company, we will enter into the Transitional Administrative and Management Services Agreement (the “Transitional Services Agreement”) pursuant to which the Company will provide Mtron with a variety of services, and Mtron will provide payroll services to the Company, following the spin-off. Among the principal services that the Company will provide to us are:

• accounting, financial reporting and consolidation services;

• treasury services, including, without limitation, insurance and risk management services and administration of benefits; and

• tax planning, tax return preparation, recordkeeping and reporting services.

In providing the services pursuant to the Transitional Services Agreement, the Company may, subject to the prior written consent of Mtron, employ consultants and other advisers in addition to utilizing its own employees. In addition, Mr. Tivy, our chief accounting officer, will directly or indirectly supervise employees of Mtron that may provide services to the Company pursuant to the Transitional Services Agreement.

Services provided by the Company to Mtron or by Mtron to the Company under the Transitional Services Agreement will be charged at the rates indicated, or cost, where no rates are indicated.

The Transitional Services Agreement has a term of twelve months, and may be extended in whole or in part by agreement of the parties. The Transitional Services Agreement is terminable by either party on 30 days’ prior written notice to the other party.

Trading of Mtron Common Stock

The Company will own all of the outstanding shares of Mtron Common Stock prior to the spin-off.  Accordingly, there is no current trading market for Mtron Common Stock. The Mtron Common Stock has been approved for listing on the NYSE American, under the symbol “MPTI”.  The Company expects that the Mtron Common Stock will be listed on the NYSE American on or promptly after the distribution date.  However, there are no assurances that an active public market for Mtron Common Stock will develop or be sustained after the distribution.  If an active public market does not develop or is not sustained, it may be difficult for our stockholders to sell their shares of Mtron Common Stock at a price that is attractive to them, or at all.

It is expected that a limited trading in the over-the-counter market, commonly known as a “when-issued” trading market, for shares of Mtron Common Stock will begin one trading day before the record date.  “When-issued” trading refers to a transaction made conditionally because the security has been authorized but not yet issued.  Generally, shares may trade in the over-the-counter on a “when-issued” basis after they have been authorized but not yet formally issued, which is often initiated by participants in the over-the-counter market prior to the record date relating to the issuance of such shares.  Any “when-issued” transactions in Mtron Common Stock will be settled after the shares of Mtron Common Stock have been issued to the Company’s stockholders.  It is expected that “when-issued” trading in Mtron Common stock will end and “regular way” trading will begin on the first trading day following the distribution date.  “Regular way” trading refers to trading after a security has been issued.

We cannot predict the trading prices for Mtron Common Stock when trading begins.  Those prices will be determined by the marketplace.  Prices at which trading in Mtron Common Stock occurs may fluctuate significantly.  Trading prices for Mtron Common Stock may be influenced by many factors, including our operating results, investor perception of Mtron, market fluctuations and general economic conditions.  In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the performance of many stocks and that have often been unrelated or disproportionate to the Company’s operating performance.  These are just some of the factors that may adversely affect the market price of Mtron Common Stock.  See “Risk Factors” for further discussion of risks which may impact Mtron and the trading price of its common stock.

Shares of Mtron Common Stock received by the Company’s stockholders in connection with the spin-off will be freely transferable, except for shares received by persons who may be deemed to be our affiliates under the Securities Act.  The Company’s stockholders that receive shares of Mtron Common Stock in the spin-off and are deemed affiliates of Mtron will be permitted to sell their shares of Mtron Common Stock only pursuant to an effective registration statement under the Securities Act or in accordance with Rule 144 of the Securities Act or another exemption from the registration requirements of the Securities Act.

30

 

 

---

 

Trading of the Company’s common stock Between the Record Date and the Distribution Date

The Company’s common stock is listed on the NYSE American under the trading symbol “LGL”.  It is anticipated that, beginning on the record date and continuing until the time of the distribution, there will be two markets in shares of the Company’s common stock on the NYSE American: a “regular-way” market and an “ex-distribution” market.  Shares of the Company’s common stock that trade on the “regular-way” market will trade with an entitlement to the shares of Mtron Common Stock to be distributed in the spin-off in respect thereof.  Shares of the Company’s common stock that trade on the “ex-distribution” market will trade without an entitlement to shares of Mtron Common Stock.  Therefore, if a stockholder sells shares of the Company’s common stock in the “regular-way” market on or prior to the time of the distribution, such stockholder will also be selling the right to receive the shares of Mtron Common Stock that such stockholder would have otherwise received in the spin-off in respect of the shares of the Company’s common stock being sold.  If a stockholder owns shares of the Company’s common stock on the record date and sells those shares on the “ex-distribution” market on or prior to the time of the distribution, such stockholder will continue to be entitled to receive the shares of Mtron Common Stock which are distributed in the spin-off in respect of the shares of the Company’s common stock being sold.

Material U.S. Federal Income Tax Consequences of the Spin-Off

The following is a discussion of material U.S. federal income tax consequences of the distribution of Mtron Common Stock to “U.S. holders” (as defined below) of the Company’s common stock. This summary is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury Regulations promulgated thereunder, rulings and other administrative pronouncements issued by the Internal Revenue Service (the “IRS”), and judicial decisions, all as in effect on the date of this information statement, and all of which are subject to change at any time, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. This discussion applies only to U.S. holders of shares of the Company’s common stock who hold such shares as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion is based upon the assumption that the distribution, together with certain related transactions, will be consummated in accordance with the separation documents and as described in this information statement. This summary is for general information only and is not tax advice. It does not discuss all aspects of U.S. federal income taxation that may be relevant to a particular holder in light of its particular circumstances or to holders subject to special rules under the Code (including, but not limited to, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, partners in partnerships that hold the Company’s common stock, pass-through entities, traders in securities who elect to apply a mark-to-market method of accounting, shareholders who hold the Company’s common stock as part of a “hedge,” “straddle,” “conversion,” “synthetic security,” “integrated investment” or “constructive sale transaction,” individuals who receive the Company’s common stock upon the exercise of employee stock options or otherwise as compensation, holders who are liable for alternative minimum tax or any holders who actually or constructively own more than 5% of the Company’s common stock). This discussion also does not address any tax consequences arising under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010, nor does it address any tax considerations under state, local or foreign laws or U.S. federal laws other than those pertaining to the U.S. federal income tax.

If a partnership, including for this purpose any entity or arrangement that is treated as a partnership for U.S. federal income tax purposes, holds the Company’s common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. An investor that is a partnership and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of the separation and distribution.

For purposes of this discussion, a “U.S. holder” is any beneficial owner of the Company’s common stock that is, for U.S. federal income tax purposes:

THE FOLLOWING DISCUSSION IS A SUMMARY OF MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SEPARATION AND DISTRIBUTION UNDER CURRENT LAW AND IS FOR GENERAL INFORMATION ONLY. ALL

31

 

 

---

 

HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE APPLICATION AND EFFECT OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.

The Company has not sought and does not intend to seek a ruling from the IRS with respect to the treatment of the distribution and certain related transactions for U.S. federal income tax purposes and there can be no assurance that the IRS will not assert that the distribution is taxable. The Company believes that the distribution of Mtron Common Stock to effect the spin-off is a transaction that is generally tax-free under Sections 355 and 368(a)(1)(D) of the Code. The Company does not plan to obtain an opinion of tax counsel or other tax advisors with respect to the distribution.

Notwithstanding the Company’s intention to treat the spin-off as tax-free for U.S. federal income tax purposes, the IRS could assert that the distribution does not qualify for tax-free treatment for U.S. federal income tax purposes. If the IRS were successful in asserting this position, the Company, Mtron and the Company’s stockholders could be subject to significant U.S. federal income tax liability. Please refer to “Material U.S. Federal Income Tax Consequences if the Distribution is Taxable” below.

Material U.S. Federal Income Tax Consequences if the Distribution Qualifies as a Transaction that is Generally Tax-Free Under Sections 355 and Sections 368(a)(1)(D) of the Code

Assuming the distribution qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, the U.S. federal income tax consequences of the distribution are as follows:

If a U.S. holder of the Company’s common stock holds different blocks of the Company’s common stock (generally shares of the Company’s common stock purchased or acquired on different dates or at different prices), such holder should consult its tax advisor regarding the determination of the basis and holding period of shares of Mtron Common Stock received in the distribution in respect of particular blocks of the Company’s common stock.

Material U.S. Federal Income Tax Consequences if the Distribution is Taxable

As discussed above, the Company has not sought and does not intend to seek a ruling from the IRS with respect to the treatment of the distribution for U.S. federal income tax purposes. Notwithstanding the Company’s intention to treat the distribution as tax-free for U.S. federal income tax purposes, the IRS could assert that the distribution does not qualify for tax-free treatment for U.S. federal income tax purposes. If the IRS were successful in asserting this position, some or all of the consequences described above would not apply and the Company, Mtron and the Company’s stockholders could be subject to significant U.S. federal income tax liability. In addition, certain events that may or may not be within the control of the Company or Mtron could cause the distribution not to qualify for tax-free treatment for U.S. federal income tax purposes.

If the distribution fails to qualify as a tax-free transaction for U.S. federal income tax purposes under Section 355 and Section 368(a)(1)(D) of the Code, in general, the Company would recognize taxable gain as if it had sold the Mtron Common Stock in a taxable sale for its fair market value (unless the Company and Mtron jointly make an election under Section 336(e) of the Code with respect to the distribution, in which case, in general, (a) the Company would recognize taxable gain as if Mtron had sold all of its assets in a taxable sale in exchange for an amount equal to the fair market value of the Mtron Common Stock and the assumption of

32

 

 

---

 

all Mtron liabilities and (b) Mtron would obtain a related step up in the basis of its assets) and the Company’s stockholders who receive Mtron Common Stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.

Even if the distribution were to otherwise qualify as tax-free under Sections 355 and 368(a)(1)(D) of the Code, it may result in taxable gain to the Company under Section 355(e) of the Code if the distribution were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, shares representing a 50% or greater interest (by vote or value) in the Company or Mtron. For this purpose, any acquisitions of the Company or Mtron shares within the period beginning two years before the distribution and ending two years after the distribution are presumed to be part of such a plan, although Mtron or the Company may be able to rebut the presumption depending on the circumstances.

In connection with the distribution, Mtron and the Company will enter into a Tax Indemnity and Sharing Agreement pursuant to which Mtron will be responsible for certain liabilities and obligations following the distribution. In general, under the terms of the tax matters agreement, if the distribution, together with certain related transactions, were to fail to qualify as a tax-free transaction under Sections 355 and 368(a)(1)(D) of the Code (including as a result of Section 355(e) of the Code) if such failure were the result of actions taken after the distribution by the Company or Mtron, then the party responsible for such failure will be responsible for all taxes imposed on the Company to the extent such taxes result from such actions. For a discussion of the tax matters agreement, see “Certain Relationships and Related Person Transactions—Tax Matters Agreement.” Mtron’s indemnification obligations to the Company under the tax matters agreement are not expected to be limited in amount or subject to any cap. If Mtron is required to indemnify the Company and its subsidiaries and their respective officers and directors under the circumstances set forth in the tax matters agreement, Mtron may be subject to substantial liabilities.

Backup Withholding and Information Reporting

Payments of cash to U.S. holders of the Company’s common stock in lieu of fractional shares of Mtron Common Stock may be subject to information reporting and backup withholding (currently, at a rate of 24%), unless such U.S. holder delivers a properly completed IRS Form W-9 certifying such U.S. holder’s correct taxpayer identification number and certain other information, or otherwise establishes an exemption from backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or credited against a U.S. holder’s U.S. federal income tax liability provided that the required information is timely furnished to the IRS.

THE FOREGOING DISCUSSION IS A SUMMARY OF MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SEPARATION AND DISTRIBUTION UNDER CURRENT LAW AND IS FOR GENERAL INFORMATION ONLY. THE FOREGOING DISCUSSION DOES NOT PURPORT TO ADDRESS ALL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SEPARATION AND DISTRIBUTION OR TAX CONSEQUENCES THAT MAY ARISE UNDER THE TAX LAWS OF OTHER JURISDICTIONS OR THAT MAY APPLY TO PARTICULAR CATEGORIES OF STOCKHOLDERS. HOLDERS OF THE COMPANY’S COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE APPLICATION OF U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS, AND THE EFFECT OF POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE.

 

 

Reason for Furnishing this Information Statement 

We are furnishing this information statement to you, as a stockholder of the Company entitled to receive shares of Mtron Common Stock in the spin-off, for the sole purpose of providing you with information about the spin-off and Mtron.  This information statement is not, and you should not consider it, an inducement or encouragement to buy, hold or sell any securities of the Company or Mtron.  We believe that the information in this information statement is accurate as of the date set forth on the cover.  Changes may occur after that date and neither the Company nor Mtron undertakes any obligation to update the information except as may be required by law.

33

 

 

---

 

Dividend Policy

In advance of the spin-off, Mtron is expected to declare and pay to the Company as its sole stockholder a special dividend in the amount of $4,215,000, which will eliminate the amount currently due from the Company of $4,112,000 and result in a $103,000 net cash dividend payment. As a result of the dividend, Mtron will have a cash balance of $1,000,000 upon the completion of the spin-off.  Following the spin-off, dividends by Mtron will be at the discretion of our board of directors based on our financial condition, results of operations and capital requirements, and considerations that our board of directors consider relevant.  In addition, the terms of agreements governing our indebtedness, whether existing at the time of the spin-off or subsequently entered into, may limit or prohibit dividend payments.  It is currently expected that, for the foreseeable future following the spin-off, we will retain any earnings for use in the operation of our business.  Accordingly, Mtron does not anticipate paying any cash dividends on our common stock for the foreseeable future.

34

 

 

---

 

 

Capitalization

The following table presents our cash and cash equivalents and capitalization as of June 30, 2022 on a historical basis and on a pro forma basis to give effect to the spin-off and the related transactions and events described in this information statement as if the spin-off and such related transactions and events had occurred on June 30, 2022.  We are providing the following capitalization table for informational purposes only.  You should not construe it as indicative of our capitalization or financial condition had the spin-off and the related transactions and events been completed on the date assumed.  The capitalization table below also may not reflect the capitalization or financial condition that would have resulted had Mtron been operated as a separate company apart from the Company’s organization at that date or our future capitalization or financial condition.  You should read the table below in conjunction with the financial and other information included in the sections of this information statement entitled “Unaudited Pro Forma Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our historical financial statements and accompanying notes included elsewhere in this information statement.

 

35

 

 

---

 

Selected Historical COMBINED Financial DATA

The following table presents selected historical combined financial data for the periods indicated below. We derived the selected historical combined financial data as of and for the three and six months ended June 30, 2022 and 2021 from our unaudited interim condensed combined financial statements included elsewhere in this information statement. We derived the selected historical combined financial data as of December 31, 2021 and 2020, and for each of the years in the two-year period ended December 31, 2021 and 2020, from our audited combined financial statements included elsewhere in this information statement. In management’s opinion, the unaudited combined financial data has been prepared on the same basis as our audited combined financial statements and includes all adjustments necessary for a fair statement of the data for the periods presented.

The historical statements of operations reflect allocations of general corporate expenses from the Company, including, but not limited to, executive management, accounting, and other shared services.  These expenses have been allocated to Mtron on the basis of direct usage when identifiable, while the remainder of the expenses, including costs related to executive compensation, were allocated primarily on a pro-rata basis based on segment revenues.  Management considers these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, Mtron.  The allocations may not, however, reflect the expenses Mtron would have incurred as a stand-alone public company for the periods presented.  Actual costs that may have been incurred if Mtron had been a stand-alone public company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.  The financial statements included in this information statement may not necessarily reflect our financial position, results of operations and cash flows as if Mtron had operated as a stand-alone public company during all periods presented.  Accordingly, our historical results may not be a reliable indicator of its future performance or financial condition.

In presenting the financial data in conformity with GAAP, we are required to make estimates and assumptions that affect the amounts reported.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” included elsewhere in this information statement for a detailed discussion of the accounting policies that management believes require subjective and complex judgments that could potentially affect reported results.

The selected historical financial data presented below should be read in conjunction with our audited combined financial statements included elsewhere in this information statement and the financial and other information contained in the sections of this information statement entitled “Unaudited Pro Forma Financial Statements,” “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Below amounts are in thousands, except for percentage of revenues:

36

 

 

---

 

 

Unaudited Pro Forma Financial Statements

The unaudited pro forma combined financial statements set forth below have been derived from our historical annual financial statements, including our unaudited combined balance sheet as of June 30, 2022, and our unaudited combined statement of operations for the three and six months ended June 30, 2022 and for the year ended December 31, 2021, which are included elsewhere in this information statement.  Our historical combined financial statements include allocations of certain expenses from the Company, including expenses for costs related to functions such as tax, accounting, general management, executive services and centrally managed employee benefit arrangements.

The unaudited pro forma combined financial statements consist of an unaudited pro forma combined statement of operations for the three and six months ended June 30, 2022 and for the year ended December 31, 2021 and an unaudited pro forma combined balance sheet as of June 30, 2022. The unaudited pro forma combined financial statements should be read in conjunction with our historical audited combined financial statements and the related notes, “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement.

The unaudited pro forma combined statements of operations have been prepared to include transaction accounting, and autonomous entity adjustments to reflect the financial condition and results of operations as if Mtron were a separate stand-alone entity as if the spin-off had occurred or became effective as of January 1, 2021, the beginning of our most recently completed fiscal year. The unaudited pro forma combined balance sheet has been prepared to give effect to the adjustments as though the spin-off had occurred as of June 30, 2022. The unaudited pro forma combined financial statements constitute forward-looking information and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Special Note Regarding Forward-Looking Statements.”

The unaudited pro forma combined financial statements presented below have been derived from our historical audited combined financial statements and the unaudited combined interim financial statements included elsewhere in this information statement and do not purport to represent what our financial position and results of operations would have been had the separation of Mtron from the Company occurred on the dates indicated and are not necessarily indicative of our future financial position and future results of operations. In addition, the unaudited pro forma combined financial statements are provided for illustrative and informational purposes only. The pro forma adjustments are based on available information and assumptions that management believes are reasonable; however, such adjustments are subject to change.

The Company did not account for us as, and we were not operated as, an independent, publicly traded company for the periods presented. Our unaudited pro forma combined financial statements have been prepared to reflect transaction accounting, and autonomous entity adjustments as if Mtron were a separate stand-alone and publicly traded entity.

Transaction accounting adjustments that reflect the effects of Mtron’s legal separation from LGL include:

 

Autonomous entity adjustments of incremental expense or other changes necessary to reflect the operations and financial position of Mtron as an autonomous entity when Mtron was previously part of LGL include the following adjustments:

37

 

 

---

 

The Company expects that Management Adjustments for dis-synergies representing the significant estimates of costs of being an independent, publicly traded company would necessarily include $168,000 and $333,000 in estimated expenses for the three and six months ended June 30, 2022, respectively, and $810,000 for the year ended December 31, 2021, with expected tax expense of $32,000 and $68,000 for the three and six months ended June 30, 2022, respectively, and $203,000 for the year ended December 31, 2021. These Management Adjustments include costs based on estimated expenses paid by LGL which were not allocated to Mtron as a standalone entity, but which would be expected to be incurred upon and following our expected listing and operation as a publicly traded company.

Management Adjustments for the significant estimates of costs of being an independent, publicly traded company include the following adjustments:

The pro forma financial information presented herein reflects all Management’s Adjustments that are, in management’s opinion, necessary to a fair statement of the pro forma financial information presented.

Subject to the terms of the Separation and Distribution Agreement, the Company will pay all nonrecurring third-party costs and expenses related to the separation and incurred prior to the completion of the separation. Such nonrecurring amounts are expected to include third-party legal and accounting fees, and similar costs. After the completion of the separation, subject to the terms of the Separation and Distribution Agreement, the Transition Services Agreement and other agreements entered into between the Company and us in connection with the separation, all costs and expenses related to the separation incurred by either the Company or us will be borne by the party incurring the costs and expenses unless otherwise agreed between the Company and us.

Our retained cash balance is subject to adjustments prior to and following the completion of the separation. The following unaudited pro forma combined balance sheet reflects the adjustments as of June 30, 2022, but such adjustments represent a financial projection and are subject to change upon implementation of the spin-off.

 

38

 

 

---

 

 

MTRON BUSINESS OF THE LGL GROUP, INC.

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

As of June 30, 2022

(Dollars in Thousands, Except Share and Par Value Amounts)

 

 

See Notes to Unaudited Pro Forma Combined Financial Statements

39

 

 

---

 

MTRON BUSINESS OF THE LGL GROUP, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

Three Months Ended June 30, 2022

(Dollars in Thousands, Except Per Share Amounts)

 

 

See Notes to Unaudited Pro Forma Combined Financial Statements

 

 

40

 

 

---

 

 

MTRON BUSINESS OF THE LGL GROUP, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

Six Months Ended June 30, 2022

(Dollars in Thousands, Except Per Share Amounts)

 

41

 

 

---

 

 

MTRON BUSINESS OF THE LGL GROUP, INC.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

Year Ended December 31, 2021

(Dollars in Thousands, Except Per Share Amounts)

 

 

See Notes to Unaudited Pro Forma Combined Financial Statements

42

 

 

---

 

 

Notes to Unaudited Pro Forma Combined Financial Statements

Management Adjustments for dis-synergies representing the significant estimates of costs of being an independent, publicly traded company would necessarily include $168,000 and $333,000 in estimated expenses for the three and six months ended June 30, 2022, respectively, and $810,000 for the year ended December 31, 2021, with expected tax benefits of $32,000 and $68,000 for the three and six months ended June 30, 2022, respectively, and $203,000 for the year ended December 31, 2021.

Pro Forma net income from continuing operations, after Management’s Adjustments, would be $350,000 and $835,000 for the three and six months ended June 30, 2022, respectively, and $979,000 for the year ended December 31, 2021, or $0.13 per share and $0.31 per share for the three and six months ended June 30, 2022, respectively, and $0.37 per share for the year ended December 31, 2021, on a basic and diluted basis.

 

 

 

43

 

 

---

 

 

Business

You should read the following business description in conjunction with our audited combined financial statements and related notes appearing elsewhere in this information statement.

General

Mtron, an operating company originally founded in 1965, along with its subsidiaries, designs, manufactures and markets highly-engineered, high reliability frequency and spectrum control products. These electronic components ensure reliability and security in aerospace and defense communications, low noise and base accuracy for laboratory instruments, and synchronous data transfers throughout the wireless and Internet infrastructure.

The Company’s operations include those related to its manufacturing operations in Yankton, South Dakota and those of its two principal subsidiaries; (1) Piezo Technology, Inc. ("PTI") and (2) M-tron Asia, LLC ("Mtron Asia"). PTI is a manufacturer with its principal administrative, sales, and manufacturing operations in Orlando, Florida, and directly owns Piezo Technology India Private, Ltd., which operates a manufacturing plant located in Noida, India. Mtron Asia is a holding company that owns M-tron Industries, Ltd., which operates a sales office in Hong Kong, a special administrative region of China.

Mtron has operations in Orlando, Florida; Yankton, South Dakota; and Noida, India, and has sales offices in Austin, Texas and Hong Kong. Mtron and its subsidiaries currently operate together as a single group under the MtronPTI brand (“Mtron PTI”).

Business Strategy

Our primary objective is to create long-term growth with a market-based approach of designing and offering new products to our customers through both organic research and development, and through strategic partnerships, joint ventures, acquisitions or mergers. We seek to leverage our core strength as an engineering leader to expand client access, add new capabilities and continue to diversify our product offerings. Our focus is on investments that will differentiate our company competitively, broaden our portfolio and lead toward higher levels of integration organically and through joint venture, merger and acquisition opportunities. We believe that successful execution of this strategy will lead to a transformation of our product portfolio towards longer product life cycles, better margins and improved competitive position.

Operations

We manufacture our products out of facilities that we own in Orlando, Florida and Yankton, South Dakota, and a manufacturing facility we lease in Noida, India. We lease and maintain a sales office in Hong Kong, a special administrative region of China.

Products

Our portfolio is divided into two product groupings, Frequency Control and Spectrum Control, and has expanded from primarily crystal-based components to include higher levels of integration, advanced materials science, cavity-based products, and various types of compensation methods employing integrated circuits and other methods to create products geared for applications that require high reliability in harsh environments. These products are differentiated by their precise level of accuracy, stability over time and within harsh environments, and very low phase noise.

Our Frequency Control product group includes a broad portfolio of quartz crystal resonators, clock oscillators, VCXO, TCXO OCXO and DOCXO devices which meet some of the tightest specifications, including IEEE 1588 standards. These devices may be based on quartz, quartz MEMS or advanced materials science designed to achieve higher performance levels than quartz. Our products offer high reliability over a wide temperature range and are well-suited for harsh environments, including shock and vibration-resistant oscillators with low-g sensitivity. These products are designed for applications within aerospace and defense, telecommunications infrastructure and instrumentation markets.

44

 

 

---

 

Our Spectrum Control product group includes a wide array of radio frequency (“RF”), microwave and millimeter wave filters and diplexers covering a frequency range from 1 MHz to 90 GHz, and solid-state power amplifiers covering a frequency range from 300 MHz to 26 GHz, with power output from 10 Watts to 10 kWatts. Filter devices include crystal, ceramic, LC, tubular, combline, cavity, interdigital and metal insert waveguide, as well as digital, analog and mechanical tunable filters, switched filter arrays and RF subsystems. Power amplifiers add active devices to Mtron’s portfolio and include GaN, GaAS FET, LDMOS and chip and wire technologies in narrow or broadband, module or rack-mounted packages. These products are employed in applications within the aerospace, defense, space and commercial markets.

New product development continues to be a key focus for us as we continue to push our roadmap to meet the needs of our served markets. Within Frequency Control, design efforts are focused on smaller packages, lower power, lower phase noise and use of new materials to provide compensation and harsh environment performance that surpasses customer requirements. Spectrum Control seeks to develop higher power handling, higher levels of integration and a range of integrated products within the RF subsystem.

Customers

We primarily work directly with original equipment manufacturers (“OEMs”) to define the right solutions for their unique applications, including the design of custom parts with unique part numbers. Actual sales of production parts may be directly to the OEM or through either our designated contract manufacturers or through franchised distributors of our products. As a result, Mtron has highly-skilled sales engineers who work directly with the designers and program managers at their OEMs providing a high-level of engineering support at all points within the process.

For the three and six months ended June 30, 2022, our largest customer, a commercial aerospace and defense company, accounted for $2,111,000, or 29.9% and $4,173,000, or 28.3%, respectively, of our total revenues, compared to $1,704,000, or 26.6% and $3,117,000, or 24.6%, of our total revenues for the three and six months ended June 30, 2021, respectively. In 2021, our largest customer accounted for $7,838,000, or 29.4%, of our total revenues, compared to $7,802,000, or 26.0%, of our total revenues in 2020.  Our second largest customer, a defense contractor, accounted for $884,000, or 11.3% and $1,803,000, or 12.2%, of our total revenues in the three and six months ended June 30, 2022, respectively, compared to $817,000, or 12.8% and $1,851,000, or 14.6%, of our total revenues in the three and six months ended June 30, 2021, respectively. Our second largest customer accounted for $3,138,000, or 11.8%, of our total revenues in 2021, compared to $5,550,000, or 18.5%, of our total revenues in 2020. The loss of either of these customers, or a decrease in their demand for our products, could have a material adverse effect on our results.

As of June 30, 2022, four of our largest customers accounted for approximately $3,362,000, or 69.5% of accounts receivable. The insolvency of any of these customers could have a material adverse impact on our liquidity.

Competition

Mtron designs, manufactures and markets products for the generation, synchronization and control of time and frequency as well as spectrum control products. There are numerous domestic and international manufacturers who are capable of providing custom-designed products comparable in quality and performance to our products. Our competitive strategy begins with our focus on niche markets where precise specification and reliability are the major requirements. Competitors in our electronic components segment include, but are not limited to, Vectron International and Microsemi Corporation (both divisions of Microchip Technology Incorporated), K&L Microwave (a division of Dover Corporation) and Rakon Limited.

Research and Development

Utilizing our understanding of market requirements, we employ a disciplined approach to capital allocation when selecting new product development projects. A cross-functional team comprised of engineering, marketing, operations, sales and finance reviews the merits of specific projects seeking to invest in products that will exceed a specific return on investment level and a payback expectation within one to two years. In addition, the team considers the inherent value of intellectual property that each project presents with consideration for technical roadmap objectives.

Our research and development expenses were approximately $981,000 and $1,032,000 for the six months ended June 30, 2022 and 2021, respectively and was $2,006,000 and $2,036,000 in 2021 and 2020, respectively. Research and development will remain a significant part of our efforts to revitalize our intellectual property position.

Marketing and Sales

Mtron has a highly skilled team of sales engineers who work in tandem with a worldwide network of more than 30 independent external manufacturer representatives and franchised electronics distributors to market and sell our products. An important part of the sales process is gaining qualification of specific products from the OEM, confirming suitability for use in a specific system design,

45

 

 

---

 

which is commonly referred to as a “design-win.” Through direct contact with our clients and through our representative network, we are able to understand the needs of the marketplace and then guide our product development process to allocate resources to meeting those requirements.

Domestic Revenues

Our domestic revenues were $5,235,000, or 74.1% and $10,796,000, or 73.2% for the three and six months ended June 30, 2022, respectively, of total combined revenues, compared to $5,026,000, or 78.4% and $10,035,000, or 79.3% of total combined revenues, for the three and six months ended June 30, 2021, respectively. Our domestic revenues were $20,952,000 in 2021, or 78.5% of total combined revenues, compared to $22,702,000, or 75.7% of total combined revenues, in 2020.

Foreign Revenues

Our foreign revenues were $1,829,000 and $3,959,000 for the three and six months ended June 30, 2022, respectively, or 25.9% and 26.8%, respectively, of total combined revenues, compared to $1,381,000 and $2,626,000 for the three and six months ended June 30, 2021, respectively, or 21.6% and 20.7%, respectively, of total combined revenues, and $5,742,000 in 2021, or 21.5% of total combined revenues, compared to $7,282,000 in 2020, or 24.3% of total combined revenues. These revenues were derived mainly from customers in Asia, with significant sales in Malaysia. We avoid significant currency exchange risk by transacting and settling substantially all of our foreign sales in United States dollars.

Seasonality

Our business is not seasonal, although shipment schedules may be affected by the production schedules of our customers or their contract manufacturers based on regional practices or customs.

Order Backlog

As of June 30, 2022, our order backlog was $43,233,000, compared to $29,439,000 at December 31, 2021 and $21,095,000 at June 30, 2021. The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent, which we have determined are firm orders and likely to proceed. The Company attained record backlog levels as of June 30, 2022.

Our record backlog and bookings during the last three quarters reflects improved orders from the continued recovery of the avionics market along with strong defense orders, as we continue to pull in orders from our customers for 2023 and beyond, much of which is expected to ship subsequent to 2022. Supply chain constraints within our industry have pushed our customers to order well in advance to secure product deliveries for their production requirements. The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent which we have determined are firm orders likely to be fulfilled largely in the next 12 months but can extend past two years. Order backlog is adjusted quarterly to reflect project cancellations, deferrals, revised project scope and cost, and sales of subsidiaries, if any.

Raw Materials

Generally, most raw materials used in the production of our products are available in adequate supply from a number of sources and the prices of these raw materials are relatively stable. However, some raw materials, including printed circuit boards, quartz and certain metals including steel, aluminum, silver, gold, tantalum and palladium, are subject to greater supply fluctuations and price volatility, as experienced in recent years. In general, we have been able to include some cost increases in our pricing, but in some cases our margins were adversely impacted.

The outbreak of the novel COVID-19 coronavirus has caused a global pandemic that has disrupted supply chains and the ability to obtain components and raw materials around the world for most companies, including Mtron. On occasion, one or more of the components used in our products have become unavailable resulting in unanticipated redesign and/or delays in shipments. Continued identification of alternative supply sources or other mitigations are important in minimizing disruption to our supply chain.

Intellectual Property

Mtron has no patents, trademarks or licenses that are considered to be significant to our business or operations. Rather, we believe that our technological position depends primarily on the technical competence and creative ability of our engineering and technical staff in areas of product design and manufacturing processes, including our staff’s ability to customize products to meet difficult specifications, as well as proprietary know-how and information.

46

 

 

---

 

Government Regulations

As a supplier to certain U.S. Government defense contractors, Mtron must comply with significant procurement regulations and other requirements. Maintaining registration under the International Traffic in Arms Regulations for all of our related production facilities is also required. One of those production facilities must comply with additional requirements for our production processes and for selected personnel in order to maintain the security of classified information. These requirements, although customary within these markets, increase our performance and compliance costs.

We are routinely audited and reviewed by the U.S. Government and its agencies such as the Defense Contract Audit Agency and Defense Contract Management Agency. These agencies review our performance under our contracts, our cost structure and our compliance with applicable laws, regulations and standards, as well as the adequacy of our internal control systems and policies. Any cost found to be improperly allocated to a specific contract will not be reimbursed. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions.

From time to time, we may also be subject to U.S. Government investigations relating to our or our customers’ operations and products, and are expected to perform in compliance with a vast array of federal laws, including the Truth in Negotiations Act, the False Claims Act, the International Traffic in Arms Regulations promulgated under the Arms Export Control Act, and the Foreign Corrupt Practices Act. We or our customers may be subject to reductions of the value of contracts, contract modifications or termination, and the assessment of penalties and fines, which could negatively impact our results of operations and financial condition, or result in a diminution in revenue from our customers, if we or our customers are found to have violated the law or are indicted or convicted for violations of federal laws related to government security regulations, employment practices or protection of the environment, or are found not to have acted responsibly as defined by the law. Such convictions could also result in suspension or debarment from serving as a supplier to government contractors for some period of time. Such convictions or actions could have a material adverse effect on us and our operating results. The costs of cooperating or complying with such audits or investigations may also adversely impact our financial results.

Mtron’s manufacturing operations, products, and/or product packaging are subject to environmental laws and regulations governing air emissions, wastewater discharges, and the handling, disposal and remediation of hazardous substances, wastes and other chemicals. In addition, more stringent environmental regulations may be enacted in the future, both within the United States and internationally, and we cannot presently determine the modifications, if any, in our operations that any future regulations might require, or the cost of compliance that would be associated with such regulations. To date, capital expenditures, earnings and the competitive position of Mtron have not been materially affected by compliance with current federal, state, and local laws and regulations (domestic and foreign) relating to the protection of the environment. However, we cannot predict the effect of future laws and regulations.

Employees

As of December 31, 2021, Mtron employed 295 people, including 153 full-time and 13 part-time employees, along with 129 contractors. Of this total, Mtron has 143 full-time, 12 part-time, and 11 contract employees within the U.S., with 139 located in Orlando, Florida, and 27 in Yankton, South Dakota. Mtron has two full-time employees and one part-time employee in Hong Kong, and eight full-time employees and 118 contractors in Noida, India. None of our employees are represented by a labor union and Mtron considers our relationships with employees to be good.

As an engineered products and solutions company, a significant number of our workforce consists of degreed engineers providing expertise in product design and process development.

Properties

Following the spin-off, our principal executive office will be located at 2525 Shader Road, Orlando, Florida 32804 in an office located with an operating facility. Our Orlando, Florida operating facility contains approximately 71,000 square feet on approximately five acres of land. Mtron also owns a facility in Yankton, South Dakota, containing approximately 32,000 square feet on approximately eleven acres of land. Mtron also leases approximately 13,000 square feet of office and manufacturing space in Noida, India. Mtron also leases sales customer support office space in Hong Kong and Austin, Texas. It is our opinion that the facilities referred to above are in good operating condition, suitable, and adequate for present uses.

Legal Proceedings

Mtron is not a party to any litigation or other legal or regulatory proceedings.

47

 

 

---

 

 

Management’s Discussion and
Analysis of Financial Condition and Results of Operations

You should read the following discussion of our results of operations and financial condition together with our historical financial statements and accompanying notes that we have included elsewhere in this information statement as well as the discussion in the section of this information statement entitled “Business.” The following discussion contains forward-looking statements that involve risks and uncertainties.  The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections.  Actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including, without limitation, those discussed in the sections of this information statement entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”

The historical and pro forma financial statements included in this information statement may not reflect what our business, financial position or results of operations would have been had it been a separate, publicly-traded company during the periods presented or what our results of operations, financial position and cash flows will be in the future.  For additional information about our past financial performance and the basis of presentation of our financial statements, please see “Unaudited Pro Forma Combined Financial Statements” and our historical financial statements and the notes thereto included elsewhere in this information statement.

Overview

Mtron is engaged in the designing, manufacturing and marketing of highly-engineered, high reliability frequency and spectrum control products used to control the frequency or timing of signals in electronic circuits in various applications. Mtron’s primary markets are aerospace and defense.

The accompanying combined financial statements include the accounts of all of its majority-owned subsidiaries.

Results of Operations

Factors Which May Influence Results of Operations

We are not aware of any material trends or uncertainties, other than national economic conditions affecting our industry generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on our revenues or income other than those listed in sections of this information statement entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”

COVID-19

The COVID-19 pandemic (“COVID”) has had and may continue to have an adverse impact on our operations and financial performance, as well as on the operations and financial performance of many of the customers and suppliers in industries that we serve. The COVID pandemic continues to present business challenges, and we continue to experience impacts related to COVID, primarily in higher raw material prices, disruptions in global supply chains, delays in supplier deliveries, delays in deliveries to customers, travel restrictions, quarantine restrictions, labor shortages and employee absences.

As a result of COVID, the Company’s operations in India were closed on March 23, 2020 and resumed limited operations on May 7, 2020 with a reduced level of staffing. By the end of June 2020, the Company’s India facilities were fully operational. Post COVID revenue and bookings declined; and cost-saving measures were taken.

In accordance with the Department of Defense guidance issued in March 2020 designating the Defense Industrial Base as a critical infrastructure workforce, our U.S. production facilities have continued to operate in support of essential products and services required to meet national security commitments to the U.S. Government and the U.S. military; however, facility closures or work slowdowns or temporary stoppages have occurred and could occur in the future. In addition, other countries have different practices and policies that can affect our international operations and the operations of our suppliers and customers.

The ultimate impact of COVID on our operations and financial performance depends on many factors that are not within our control, including, but not limited to, duration of the pandemic, potential subsequent waves of COVID infection or potential new variants, the effectiveness and adoption of COVID vaccines and therapeutics, governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic (including shutdown orders, border closings, restrictions on travel and transport and workplace restrictions) and resulting supplier impacts. In addition, to the extent global vaccination programs do not achieve intended results and a longer period of economic and global supply chain and related disruption continues, the more adverse the impact will be on our business operations, financial performance and results of operations.

48

 

 

---

 

Supply Chain Disruptions

Material shortages are impacting the timing of our revenue by 5% to 15% each quarter. We have been able to work around material shortages by pulling in other orders, limiting labor overtime, cross training existing employees, training new hires, and replacing aging equipment. We have extended the lead times of the raw materials and sub-assemblies in our ERP system such that we place orders sooner as compared to prior periods, and we are ordering more to forecast that we have historically. We have had labor shortages since mid-2020 accompanied with higher than historical attrition and have successfully managed through this and are nearly fully staffed.

We are not aware of any material impacts due to export restrictions facing our materials suppliers; however, China-based enterprises are key suppliers of materials to us and any sanctions against them may potentially have a significant impact to our business. We are unable to de-globalize several items purchased from China as they are sole-sourced. We do not purchase any materials from Russia or Ukraine directly.

Inflationary Cost Pressures

Both our labor costs and our material costs have been increasing. We had attrition due to competitive wages, so we made wage adjustments to be able to retain and then attract the talent pool required to manufacture our products. Our suppliers have experienced the same labor cost issues, as well as commodity price increases, and have passed those price increases to us. Transportation costs as well as various disposable costs have increased for all our suppliers and customers. Certain market segments have been impacted, thereby reducing revenue, and we have adjusted our labor costs accordingly. We have been successful at passing most of these increases along to our customers, although with a delay and uncertainty whether future cost increases will also be able to be passed along given their rate and ongoing variability.

In order to mitigate these ongoing inflationary cost pressures, we have increased our purchasing volume to attain the next discount level of pricing (ordering to forecast versus firm demand), we have shopped virtually every purchase to make sure we obtain the best price, we have invested in capital equipment to improve yields and reduce costs, and we have cross-trained our work force to minimize the need to hire additional workers for specialized trades.

Cybersecurity Risks

We do not use any electronic data interchange (EDI) purchase and invoice software solutions or any other software program to connect us to our suppliers. Our products do not use software. We have dual sourced as many components and services as possible, in order to protect our supply chain from vendor disruptions due to cybersecurity risks. We have not been impacted by any cybersecurity breaches or similar incidents. If our utilities are attacked and are shut down at one of our manufacturing facilities, we have two other locations that could ramp up to duplicate some of the interrupted manufacturing. We have not conducted a cybersecurity vulnerability survey of our suppliers, but believe our efforts to diversify our supply chain will enable us to weather any issues encountered by our suppliers. Our Board’s audit committee has oversight responsibility pursuant to which it evaluates cybersecurity risks, mitigation efforts and incident response preparedness, addresses management’s risk assessments and mitigation efforts and reviews the adequacy of privacy policies and technology, privacy and information security related internal controls.

Results of Operations

Backlog

As of June 30, 2022, our order backlog was $43,233,000, compared to $29,439,000 at December 31, 2021 and $21,095,000 at June 30, 2021. The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent, which we have determined are firm orders and likely to proceed. The Company attained record backlog levels as of June 30, 2022.

Our record backlog and bookings during the last three quarters reflects improved orders from the continued recovery of the avionics market along with strong defense orders, as we continue to pull in orders from our customers for 2023 and beyond, much of which is expected to ship subsequent to 2022. Supply chain constraints within our industry have pushed our customers to order well in advance to secure product deliveries for their production requirements. The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent which we have determined are firm orders likely to be fulfilled largely in the next 12 months but can extend past two years. Order backlog is adjusted quarterly to reflect project cancellations, deferrals, revised project scope and cost, and sales of subsidiaries, if any.

49

 

 

---

 

Three months ended June 30, 2022 compared to three months ended June 30, 2021

Consolidated Revenues and Gross Margin

Total revenues were $7,064,000, or a 10.3% increase over revenues of $6,407,000 for the three months ended June 30, 2021. The revenue increase reflects the recovering avionics market and strong defense product shipments.

Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales as a percentage of revenues, improved to 37.5% from 38.4% for the three months ended June 30, 2021 reflecting the reflecting the effects of inflation and product mix.

Operating Income (Loss)

We reported operating income of $603,000 compared to operating income of $793,000 for the three months ended June 30, 2021. The decrease reflects higher revenue with lower margins partly offset by inflationary pressures.

Other (Expense) Income, Net

Other (expense) income, net was an expense of $11,000 compared to expense of $10,000 for the three months ended June 30, 2021 reflecting the impact of unfavorable currency changes.

Income Tax Expense

We recorded a tax expense of $106,000 and $146,000 for the three months ended June 30, 2022 and 2021, respectively. The expense is based on an estimated annual effective tax rate across the jurisdictions in which we operate.

Net Income

Net income was $486,000 compared to $637,000 for the three months ended June 30, 2021. The decrease was primarily from the previously discussed business operations as described above.

Six months ended June 30, 2022 compared to six months ended June 30, 2021

Consolidated Revenues and Gross Margin

Total revenues were $14,755,000, or a 16.5% increase over revenues of $12,661,000 for the six months ended June 30, 2021. The revenue increase reflects the recovering avionics market and strong defense product shipments.

Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales as a percentage of revenues, improved to 37.4% from 35.2% for the six months ended June 30, 2021 reflecting the increased business volume.

Operating Income (Loss)

We reported operating income of $1,417,000 compared to operating income of $1,095,000 for the six months ended June 30, 2021. The increase reflects higher revenue and margins partly offset by inflationary pressures and increased stock compensation expense costs in the first quarter of 2022.

Other (Expense) Income, Net

Other (expense) income, net was an expense of $31,000 compared to income of $33,000 for the six months ended June 30, 2021 reflecting the impact of unfavorable currency changes.

Income Tax Expense

We recorded a tax expense of $281,000 and $210,000 for the six months ended June 30, 2022 and 2021, respectively. The expense is based on an estimated annual effective tax rate across the jurisdictions in which we operate.

Net Income

Net income was $1,105,000 compared to $918,000 for the six months ended June 30, 2022 and 2021, respectively. The increase was primarily from the previously discussed increased business volume partly offset by certain unfavorable operating costs.

50

 

 

---

 

2021 Compared to 2020

Consolidated Revenues and Gross Margin

Total revenues were $26,694,000, a decrease of $3,290,000, or 11%, from $29,984,000 in 2020. The lower revenue was significantly impacted by the decline in shipments to the avionics market somewhat offset by strong space business performance. The comparison also reflects first quarter of 2020 pre-COVID conditions.

Consolidated gross margin, which is consolidated revenues less manufacturing cost of sales as a percentage of revenues, improved to 35.0% compared to 34.3% for the prior year. Gross margins improved over last year but were muted by inflationary cost pressures. The improved profitability was from favorable mix and cost reductions, including the elimination of certain previously required redundancies to preserve manufacturing capabilities in response to the COVID-19 impacts on our business. The Company’s India operations were shut down for over six weeks during 2020 requiring onshoring of production to U.S. factories, resulting in increased production costs. As Mtron is an essential business, we maintained our production and operations, to support our customer requirements.

Operating (Loss) Income

We reported operating income of $2,114,000 compared to operating income of $3,030,000 for the year ended December 31, 2020. This decrease reflects the lower revenues, higher non-cash stock-based compensation costs and inflationary pressures somewhat offset by the above-described profitability improvements. Engineering, selling and administrative expenses were 27.1% of revenue for the year ended December 31, 2021, compared to 24.2% of revenue for the year ended December 31, 2020.

Other Expense, Net

Other expense, net was $1,000 compared to $137,000 for the year ended December 31, 2020 reflecting interest expense and currency changes.

Income Tax Provision

We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, tax benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to the tax provision in a subsequent period.

We recognize tax benefits related to uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by taxing authorities. For those positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. For the year ended December 31, 2021, we recorded unrecognized tax benefits of $448,000.

During 2021, we released the $374,000 valuation allowance over a portion of our deferred tax assets as the deferred tax assets became more likely than not to be realized. We recorded a tax expense of $531,000 and $583,000 for the years ended December 31, 2021 and 2020, respectively. The substantially higher tax expense was driven by the increase in our unrecognized tax benefits, but was partly offset by the tax benefit from the reduction of our previously recorded valuation allowance.

Net Income

Net income was $1,582,000 compared to $2,310,000 for the year ended December 31, 2020. The decrease was from the aforementioned items noted above.

Liquidity and Capital Resources

As of June 30, 2022 and December 31, 2021, cash and cash equivalents were $1,103,000 and $2,635,000, respectively.

Cash provided by operating activities for the six months ended June 30, 2022 and 2021 was $944,000 and $890,000, respectively. The $54,000 increase was from higher receivable and inventory levels in support of business growth as well as advanced procurement of certain inventory components to address supply chain issues, offset by reduced accounts receivable and prepaid balances. Cash provided by operating activities was $2,960,000 and $3,906,000 for the years ended December 31, 2021 and 2020, respectively. The $946,000 decrease was largely due to the lower operating earnings and changes in receivable and inventory levels in 2021 as compared to 2020.

51

 

 

---

 

Cash used in investing activities for the six months ended June 30, 2022 and 2021 was $395,000 and $400,000, respectively, and related entirely to capital expenditures. Capital expenditures were for investment in production equipment to improve cost and efficiency. Cash used in investing activities for the years ended December 31, 2021 and 2020 was $1,099,000 and $407,000, respectively. Capital expenditures increased $692,000 for investment in production equipment to improve cost and efficiency.

As of June 30, 2022, our working capital was $8,538,000 compared to $9,081,000 as of December 31, 2021. As of June 30, 2022, we had current assets of $11,773,000, current liabilities of $3,235,000 and a ratio of current assets to current liabilities of 3.64 to 1.00. As of December 31, 2021, we had current assets of $12,093,000, current liabilities of $3,012,000 and a ratio of current assets to current liabilities of 4.01 to 1.00. Management continues to focus on efficiently managing working capital requirements to match operating activity levels and will seek to deploy our working capital where it will generate the greatest returns.

On May 12, 2022, the revolving line of credit with Synovus Bank expired. At June 30, 2022 and December 31, 2021, there were no outstanding borrowings under the revolving line of credit with Synovus Bank.

On June 15, 2022, Mtron entered into a loan agreement (the “Loan Agreement”) for a revolving line of credit with Fifth Third Bank, National Association, for up to $5.0 million bearing interest at the Secured Overnight Financing Rate (“SOFR”) rate plus a margin of 2.25%, with a SOFR floor of 0.00%. The loan agreement has a maturity date of June 15, 2025 and contains certain financial covenants based on the following criteria: (a) Minimum Fixed Charge Coverage Ratio; (b) Minimum Current Ratio; and (c) Minimum Tangible Net Worth (each as defined in the loan agreement). All loans pursuant to the Loan Agreement will be secured by a continuing and unconditional first priority security interest in and to any and all property of Mtron. See Note F – Revolving Credit Agreement in the accompanying notes to the unaudited condensed combined financial statements for details of the revolving credit agreement with Fifth Third Bank. At June 30, 2022, the Company had no borrowings outstanding under its revolving line of credit with Fifth Third Bank.

We believe that existing cash and cash equivalents, revolving line of credit and cash generated from operations will provide sufficient liquidity to meet our ongoing working capital and capital expenditure requirements for the next 12 months from the date of this filing. The Company’s management continues to strive for profitable growth both internally and through acquisition.

Critical Accounting Estimates

Our combined financial statements are prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are more fully described in Note B – Summary of Significant Accounting Policies, in the accompanying Notes to Combined Financial Statements. Certain accounting policies require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, and the effects of revisions are reflected in the financial statements in the period in which they are determined to be necessary. The accounting policies described below are those that most frequently require us to make estimates and judgments and, therefore, are critical to understanding our results of operations.

Income Taxes

We account for income taxes in accordance with ASC Topic 740 “Income Taxes” (“ASC 740”), which requires an asset and liability approach for the financial accounting and reporting of income taxes. Under this method, deferred income taxes are recognized for the expected future tax consequences of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These balances are measured using the enacted tax rates expected to apply in the year(s) in which these temporary differences are expected to reverse. The effect of a change in tax rates on deferred income taxes is recognized in income in the period when the change is enacted.

Based on consideration of all available evidence regarding their utilization, we record net deferred tax assets to the extent that it is more likely than not that they will be realized. Where, based on the weight of all available evidence, it is more likely than not that some amount of a deferred tax asset will not be realized, we establish a valuation allowance for the amount that, in our judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized. In reaching such conclusions, we consider available positive and negative evidence including past operating results, projections of future taxable income, the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Our projections of future taxable income include estimates and assumptions regarding our income and costs, as well as the timing and amount of reversals of taxable temporary differences.

We account for unrecognized tax benefits in accordance with ASC 740, which prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals

52

 

 

---

 

or litigation, based solely on the technical merits of the position. The tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

We had a valuation allowance of $374,000 at the year ended December 31, 2020; however, this was reversed in 2021 given our future estimates for taxable income.

Inventories

We account for inventories at the lower of cost or net realizable value using the FIFO (first-in, first-out) method. Inventory reserves are determined based on estimated losses that result from inventory that becomes obsolete or for which Mtron has excess inventory levels. In determining these estimates, Mtron performs an analysis on current demand and usage for each inventory item over historical time periods. Based on that analysis, Mtron reserves a percentage of the inventory amount within each time period based on historical demand and usage patterns of specific items in inventory. Actual experience could differ from the amounts estimated requiring adjustments to inventory valuation in future periods.

53

 

 

---

 

Certain Relationships and Related Party Transactions

Review, Approval or Ratification of Related Party Transactions

We will have in place a policy for the review and approval of transactions in which Mtron is to be a participant, where the amount involved exceeds or is expected to exceed $120,000 annually, and in which any of our directors or executive officers, or any of their immediate family members, will have a direct or indirect material interest.  Any such related party transaction is to be for the benefit of us and upon terms no less favorable to us than if the related party transaction was with an unrelated party.

It is expected that our board of directors will delegate to its Audit Committee the review and approval of related party transactions relating to directors or executive officers, or their immediate family members.  In reviewing related party transactions, the Audit Committee will evaluate and consider the terms of the related party transaction, including an assessment of the arms-length nature of the terms, and such other factors that it deems appropriate with respect to the transaction.

Related Party Transactions and Relationships

See the section of this information statement entitled “The Spin-Off—Relationship Between Mtron and the Company” for a description of the agreements expected to be entered into between the Company and Mtron in connection with the spin-off which set forth the terms and conditions of the separation of the businesses of the Company between the Company and Mtron and will govern various ongoing arrangements between the Company and Mtron upon completion of the spin-off.

54

 

 

---

 

 

Management

Directors and Executive Officers Following the Spin-Off

It is currently expected that certain of the Company’s executive officers and directors will serve as our executive officers and directors. The following table lists the names of the individuals who will serve as our executive officers and directors following the spin-off, and their expected position(s) with Mtron.

The following additional information is provided for each of the above-named individuals.  Our executive officers will be appointed by, and serve at the discretion of, our board of directors.

Executive Officers

The following table sets forth information regarding our executive officers, including their ages (as of August 19, 2022), and business experience for the past five years and prior years.

 

55

 

 

---

 

Directors

The following table sets forth information regarding our directors, including their ages (as of May 11, 2022), and business experience for the past five years and prior years.

56

 

 

---

 

57

 

 

---

 

Family Relationships

There is no family relationship between any of the individuals expected to serve as directors or executive officers of Mtron.

 

Board of Directors Composition

Our bylaws provide that our board of directors shall establish the authorized number of directors from time to time by resolution and that each director serve for a term expiring at our next annual meeting of stockholders. It is expected that our board of directors will set the number of directors comprising the board immediately following the spin-off at six directors.  Our directors will hold office until their successors have been duly elected and qualified or until the earlier of their death, resignation or removal.  An election of directors by our stockholders will be determined by plurality vote.

Director Independence

As required under NYSE American rules, following the spin-off a majority of the members of a listed company’s board of directors must qualify as “independent,” as affirmatively determined by such board of directors. Our board of directors has determined that John S. Mega, Bel Lazar, Robert V. “Rob” LaPenta Jr., and David M. Goldman will be independent within the meaning of NYSE American rules.

58

 

 

---

 

Board Committees

Following the spin-off, the standing committees of our board of directors will include an Audit Committee, a Compensation Committee and a Nominating/Corporate Governance Committee, each as further described below.

Audit Committee

Mtron will have a separately-designated Audit Committee.  The members of the Audit Committee are expected to be John S. Mega, Bel Lazar and Robert V. “Rob” LaPenta Jr., with Mr. LaPenta serving as a chairperson.  Mtron expects that each member of the Audit Committee will be deemed to be “financially literate” and “independent,” as determined in accordance with applicable rules and regulations, and that Mr. LaPenta will be determined to be an “audit committee financial expert,” as defined under Item 407 of Regulation S-K promulgated by the SEC.

The Audit Committee’s responsibilities will include, among other things, appointing, retaining, overseeing and determining the compensation and services of our independent registered public accounting firm, including pre-approval of all audit and non-audit services to be performed by our independent registered public accounting firm, overseeing the quality and integrity of our financial statements and related disclosures, overseeing our compliance with legal and regulatory requirements, assessing our independent auditors’ qualifications, independence and performance, and monitoring the performance of our internal audit and control functions.

The responsibilities of the Audit Committee, which Mtron anticipates will be substantially similar to the responsibilities of the Company’s Audit Committee, will be more fully described in the Audit Committee charter.  Mtron will post the Audit Committee charter on our website at www.mtronpti.com, and Mtron will provide it in print, without charge, to any stockholder that requests it.

Compensation Committee

Mtron will have a separately-designated Compensation Committee.  The members of the Compensation Committee are expected to be John S. Mega, Bel Lazar and Robert V. “Rob” LaPenta Jr., with Mr. Lazar serving as chairperson.  Mtron expects that each member of the Compensation Committee will be determined to be “independent,” as determined in accordance with applicable rules and regulations, and “non-employee directors” within the meaning of Section 16 of the Exchange Act.

The Compensation Committee will provide assistance to the board of directors in fulfilling its responsibilities relating to the compensation of our executive officers.  It will review and determine the compensation of our executive officers, including our chief executive officer, and administer our equity-based compensation plans.  The Compensation Committee will have the authority to retain consultants to assist the Compensation Committee in its evaluation of executive compensation, as well as the authority to approve any such consultant’s fees and retention terms.

The responsibilities of the Compensation Committee, which Mtron anticipates will be substantially similar to the responsibilities of the Company’s Compensation Committee, will be more fully described in the Compensation Committee charter.  Mtron will post the Compensation Committee charter on our website at www.mtronpti.com, and Mtron will provide it in print, without charge, to any stockholder that requests it.

Nominating/Corporate Governance Committee

Mtron will have a separately-designated Nominating/Corporate Governance Committee.  The members of the Nominating/ Corporate Governance Committee are expected to be John S. Mega, Bel Lazar and Robert V. “Rob” LaPenta Jr., with Mr. Mega serving as chairperson.  Mtron expects that each member of the Nominating/Corporate Governance Committee will be determined to be “independent,” as determined in accordance with applicable rules and regulations.

The Nominating/Corporate Governance Committee will be responsible for assisting its board of directors in identifying individuals qualified to become directors, making recommendations of candidates for directorships, developing and recommending a set of corporate governance principles to our board of directors, overseeing the evaluation of our board of directors and management, overseeing the selection, composition and evaluation of board committees, and overseeing the management continuity and succession planning process.

59

 

 

---

 

Our initial board of directors will be selected by the Company and is expected to be comprised of the individuals indicated as directors under “Directors and Executive Officers Following the Spin-Off” above.  After the spin-off, the Nominating/Corporate Governance Committee will review, following the end of each fiscal year, the composition of our board of directors and the ability of our current members to continue effectively as directors for the upcoming fiscal year.  If the Nominating/Corporate Governance Committee thinks it is in our best interest to nominate a new individual for director, or fill a vacancy on our board of directors which may exist from time to time, it will consider potential candidates for board appointments who meet the criteria for selection as a nominee and have the specific qualities or skills sought.

The responsibilities of the Nominating/Corporate Governance Committee, which Mtron anticipates will be substantially similar to the responsibilities of the Company’s Nominating/Corporate Governance Committee, will be more fully described in the Nominating/ Corporate Governance Committee charter.  Mtron will post the Nominating/Corporate Governance Committee charter on our website at www.mtronpti.com, and Mtron will provide it in print, without charge, to any stockholder that requests it.

Code of Business Conduct and Ethics

We expect that our board of directors will adopt a Code of Business Conduct and Ethics similar to the Company’s Code of Business Conduct and Ethics and that will apply to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer.  A copy of the Code of Business Conduct and Ethics will be available on our website at www.mtronpti.com, and will be available in print, without charge, to any stockholder that requests it.  In addition, Mtron will post amendments to or waivers from the Code of Business Conduct and Ethics (to the extent applicable to our principal executive officer, principal financial officer or principal accounting officer) on our website.

Corporate Governance Guidelines

We expect that our board of directors will adopt Corporate Governance Guidelines similar to those adopted by the Company’s Board of Directors.  The full text of the Corporate Governance Guidelines will be posted on our website at www.mtronpti.com and will be available in print, without charge, to any stockholder that requests it.

Risk Oversight

Our senior management will be responsible for assessing and managing the Company’s various exposures to risk on a day-to-day basis, including the creation of appropriate risk management programs and policies. The Company has developed a consistent, systemic and integrated approach to risk management to help determine how best to identify, manage and mitigate significant risks throughout the Company, which includes its system of internal control over financial reporting, annual reviews conducted by its directors and officers, monitoring compliance with its business conduct policy and general liability insurance coverage. Mtron will adopt policies and practices consistent with the Company’s risk management program. Consistent with the Company’s risk management program, our board of directors will be responsible for overseeing the company’s management in the execution of its responsibilities and for assessing our approach to risk management. Our board of directors will exercise these responsibilities periodically as part of its board meetings and also through the board’s three standing committees, each of which examines various components of enterprise risk as part of its responsibilities. In addition, an overall review of risk will be inherent in the board of director’s consideration of our long-term strategies and in the transactions and other matters presented to the board, including capital expenditures, acquisitions and divestitures, and financial matters.

Executive Sessions of Non-Employee Directors

It is expected that our non-employee directors will meet at least twice per year in executive sessions of the board of directors in which members of management, including directors who are also employees, will not participate.  Mtron expects that Mr. LaPenta will be the presiding director for the executive sessions.

Stockholder Communications

Stockholders may communicate with our board of directors, including the non-employee directors, by sending an e-mail to Linda M. Biles at [email protected] or by sending a letter to M-tron Industries, Inc., 2525 Shader Road, Orlando, Florida 32804, Attention: Corporate Secretary. The corporate secretary will submit all such correspondence to any specific director to whom the correspondence is directed.

60

 

 

---

 

Executive Compensation

Historical Compensation of the Company’s Named Executive Officers Prior to the Spin-Off

Set forth below is summary information regarding the compensation paid or accrued by the Company and its subsidiaries to or on behalf of Michael J. Ferrantino, James W. Tivy, and Linda M. Biles (who are expected to be our “Named Executive Officers,” as defined under Item 402 of Regulation S-K promulgated by the SEC) and the compensation arrangements between the Named Executive Officers and the Company prior to the spin-off.

The amounts and forms of compensation reported below do not necessarily reflect the compensation that the Named Executive Officers will receive for their services on our behalf following the spin-off because historical compensation was determined by the Company’s Compensation Committee and future compensation levels will be determined based on the compensation policies, programs and procedures to be established by our Compensation Committee.

Summary Compensation Table

The following table sets forth, for the years ended December 31, 2021 and 2020, certain summary information concerning compensation which the Company and its subsidiaries, paid to, or accrued on behalf of, certain of the Named Executive Officers.

Stock Options Adjustment

        At the time of the spin-off, all of the stock options issued pursuant to the Company’s 2011 Incentive Plan will be amended such that each option pre-spin-off strike price will be adjusted, and a new Mtron option grant will be made to reflect the value of the Company following the spin-off.

Outstanding Equity Awards at Fiscal Year End 2021

The following table sets forth the information with respect to outstanding equity awards held by the Company’s named executive officers as of December 31, 2021

61

 

 

---

 

Expected Named Executive Officer Compensation Following the Spin-Off

Following the spin-off, the compensation of the Named Executive Officers for their services on behalf of us and our subsidiaries will be determined by our Compensation Committee.  It is currently expected that, unless otherwise determined by our Compensation Committee, Mtron’s executive officers will continue to earn salary and bonus compensation commensurate with the compensation earned from the Company.  The Named Executive Officers may also receive grants of equity awards as from time to time determined by our Compensation Committee as well as perquisites and other personal benefits.

Mtron 2022 Incentive Plan

We expect that equity-based compensation will be an important component of our compensation program and believe that the ability to grant equity-based compensation awards will enhance the relationship between employee performance and the creation of stockholder value.  Accordingly, in connection with the spin-off and effective as of the distribution date, we intend to adopt the Mtron 2022 Incentive Plan (the “Incentive Plan”), the terms of which (other than the number of shares which may be awarded) are substantially similar to those of the Company’s 2021 Incentive Plan.  Set forth below is a summary of the Incentive Plan, as expected to be adopted.  The following summary is not complete and is qualified in its entirety by reference to the full text of the Incentive Plan, the form of which is attached as an exhibit to the registration on Form 10, of which this information statement is a part, and which is incorporated herein by reference.

Purpose

The Incentive Plan allows Mtron to provide employees, consultants and all members of the Board who are selected to receive awards under the Incentive Plan the opportunity to acquire an equity interest in Mtron. The Board believes that equity incentives are a significant factor in attracting and motivating eligible persons whose present and potential contributions are important to Mtron and aligning their interests with those of our stockholders.

Proposed Share Reserve

Upon the Incentive Plan becoming effective on the distribution date, 500,000 shares of common stock will be available for issuance pursuant to awards to be granted under the Incentive Plan.

Expected Duration of the Share Reserve

We expect that the share reserve under the Incentive Plan will be sufficient for awards for at least 3 to 5 years. Expectations regarding future share usage could be impacted by a number of factors, such as award type mix; hiring and promotion activity at the executive level; the rate at which shares are returned to the Incentive Plan’s reserve upon the awards’ expiration, forfeiture or cash settlement; the future performance of our stock price; the consequences of acquiring other companies; and other factors. While we believe that the assumptions we used are reasonable, future share usage may differ from current expectations.

Key Provisions

The following is a summary of the key provisions of the Incentive Plan:

62

 

 

---

 

Awards under the Incentive Plan

Stock Options. The Incentive Plan permits the Compensation Committee to issue incentive stock options and non-qualified stock options to participants, which directly link their financial success to that of Mtron stockholders. The Compensation Committee shall determine the number of shares subject to options and all other terms and conditions of the options, including vesting requirements. In no event, however, may the exercise price of a stock option be less than 100% of the fair market value of Mtron common stock on the date of the stock option’s grant, nor may any option have a term of more than ten years. Except for adjustments based on changes in the corporate structure or as otherwise provided in the Incentive Plan, the terms of an option may not be amended to reduce the exercise price nor may options be canceled or exchanged for cash, other awards or options with an exercise price that is less than the exercise price of the original options.

Additionally, in the case of an incentive stock option granted to any individual who, at the date of grant, owns stock possessing more than ten percent (10%) of the total combined voting power all classes of stock of Mtron, such incentive stock option shall be granted at a price that is not less than one hundred and ten percent (110%) of fair market value on the date of grant and such incentive stock option shall be exercisable for no more than five (5) years from the date of grant.

Stock Appreciation Rights. The Incentive Plan permits the Compensation Committee to issue stock appreciation rights (“SARs”), either free-standing or in tandem with stock options. The Compensation Committee shall determine the number of SARs to be granted and other terms and conditions of the SARs. In no event, however, may the exercise of a SAR be less than 100% of the fair market value of Mtron common stock on the date of grant, and the terms shall not exceed ten years. SARs may be settled in cash, stock, or a combination of both.

Restricted Stock and Restricted Stock Units. The Incentive Plan permits the Compensation Committee to grant restricted stock awards. Each share of restricted stock shall be subject to such terms, conditions, restrictions, and/or limitations, if any, as the Compensation Committee deems appropriate, including, but not by way of limitation, restrictions on transferability and continued employment. Holders of shares of restricted stock may vote the shares and receive dividends on such shares. Notwithstanding the foregoing, with respect to a share of restricted stock, dividends shall only be paid out to the extent that the share of restricted stock vests. The vesting period for restricted stock shall be determined by the Compensation Committee, which may accelerate the vesting of any such award. The Compensation Committee may also grant restricted stock units, which have substantially the same terms as restricted stock, except that units have no voting rights, and unless otherwise determined by the Compensation Committee, will not receive dividends or dividend equivalents (which in an event shall only be paid out to the extent that the restricted stock units vest). The Compensation Committee may also grant unrestricted stock under this provision.

Performance Shares and Performance Stock Units. The Incentive Plan permits the Compensation Committee to issue “performance shares” and “performance stock units.” These are contingent incentive awards that are converted into stock and/or cash

63

 

 

---

 

and paid out to the participant only if specific performance goals are achieved over performance periods, as set by the Compensation Committee. If the performance goals are not achieved, the awards are canceled or reduced. Performance shares are each equivalent in value to a share of common stock (payable in cash and/or stock), while performance stock units are equal to a specific amount of cash.

Stock Payments and Other Stock-Based Awards. The Incentive Plan also permits the Compensation Committee to grant awards of deferred stock, dividend equivalents, other stock-based awards, and performance bonus awards as provided in the Incentive Plan.

Eligible for Participation. Persons eligible to participate in the Incentive Plan include employees, directors, consultants and advisors, as determined by the Compensation Committee.

Available Shares. The Incentive Plan authorizes the issuance of 500,000 shares, subject to certain adjustments as set forth in the Incentive Plan.

If an outstanding award under the Incentive Plan expires or is terminated or canceled for any reason without having been exercised or settled in full, or if shares acquired pursuant to an award subject to forfeiture are forfeited under the Incentive Plan, the shares allocable to the terminated portion of such award or such forfeited shares shall again be available for issuance under the Incentive Plan. Shares shall not be deemed to have been issued pursuant to the Incentive Plan with respect to any portion of an award that is settled in cash. In the event that withholding tax liabilities arising from a full-value award (i.e., an award other than an option or stock appreciation right) are satisfied by the delivery or withholding of shares, the shares so tendered or withheld shall be added to the Incentive Plan’s reserve.

Notwithstanding anything to the contrary, the following shares shall not again be made available for issuance or delivery under the Incentive Plan: (i) shares tendered in payment of an option; (ii) shares delivered or withheld by Mtron to satisfy any tax withholding obligation with respect to an option or stock appreciation right; (iii) shares covered by a stock-settled stock appreciation right that were not issued upon the settlement of the stock appreciation right; or (iv) shares purchased on the open market with option proceeds.

Upon termination of the Incentive Plan, no further awards may be issued under the Incentive Plan.

Minimum Vesting. Subject to the acceleration of vesting in certain circumstances as permitted under the terms of the Incentive Plan, each award under the Incentive Plan will have a minimum vesting period of one year.

Dividends and Dividend Equivalents. With respect to any award that provides for or includes a right to dividends or dividend equivalents, if dividends are declared during the period that an equity award is outstanding, such dividends (or dividend equivalents) shall either (a) not be paid or credited with respect to such award or (b) be accumulated but remain subject to vesting requirement(s) to the same extent as the applicable award and shall only be paid at the time or times such vesting requirement(s) are satisfied. A participant holding an option or stock appreciation right is not eligible to receive dividends or dividend equivalents.

Clawback. Awards under the Incentive Plan and any shares issued pursuant to awards under the Incentive Plan shall be subject to recovery or “clawback” by Mtron if and to the extent that the vesting of such awards was determined or calculated based on materially inaccurate financial statements or any other material inaccurate performance metric criteria; or if Mtron or its subsidiaries terminate a grantee’s service relationship due to the grantee’s gross negligence or willful misconduct, or determine there are grounds for such a termination (whether or not such actions also constitute “cause” under an award agreement), any awards under the Incentive Plan, whether or not vested, as well as any shares of stock issued pursuant to awards under the Incentive Plan shall be subject to forfeiture, recovery and “clawback.” In addition, the Incentive Plan provides that if Mtron is required to prepare an accounting restatement due to material noncompliance with the financial reporting requirements of the securities laws, in certain cases the Compensation Committee may require the repayment of amounts paid under the Incentive Plan in excess of what the employee would have received under the accounting restatement.

Performance Awards. Subject to the general purposes, terms and conditions of the Incentive Plan and applicable law, and under the direction of the Board, the Compensation Committee shall have complete control over the administration of the Incentive Plan and shall have full authority to grant awards and determine who shall receive awards, when such awards shall be granted and the terms and conditions of such awards, including, but not limited to, conditioning the exercise, vesting, payout or other term of condition of an award on the achievement of performance goals. Such performance goals shall be based on the attainment of specified levels of one or more of the following: (i) earnings per share; (ii) sales; (iii) operating income; (iv) gross income; (v) basic or adjusted net income (before or after taxes); (vi) cash flow; (vii) gross profit; (viii) gross or operating margin; (ix) working capital; (x) earnings before interest and taxes; (xi) earnings before interest, tax, depreciation and amortization; (xii) return measures, including return on invested capital, sales, assets, or equity; (xiii) revenues; (xiv) market share; (xv) the price or increase in price of common stock; (xvi) total shareholder return; (xvii) economic value created or added; (xviii) expense reduction; (xix) implementation or completion of critical projects, including acquisitions, divestitures, and other strategic objectives, including market penetration and product development; or (xx) specified objectives with regard to limiting the level of increase in all or a portion of Mtron’s bank debt or other long term or

64

 

 

---

 

short term public or private debt or other similar financial obligations of Mtron; and any other metric that may be determined by the Committee. Such performance goals also may be based solely by reference to Mtron’s performance or the performance of a subsidiary, division, business segment or business unit of Mtron or a subsidiary, or based upon performance relative to performance of other companies or upon comparisons of any of the indicators of performance relative to performance of other companies.

Other Information. The Incentive Plan may be amended in whole or in part by the Board or the Compensation Committee with the approval of the Board and in certain circumstances with stockholder approval. Unless the Compensation Committee provides otherwise in advance of the grant, in the event of a Change in Control (as defined in the Incentive Plan), if the employee is terminated other than for “cause” within one year of a Change in Control, options and restricted stock (including restricted stock units) shall vest.

Tax Aspects Under the Code

The following summary is intended only as a general guide to the U.S. federal income tax consequences under current law of equity-based awards that may be granted under the Incentive Plan. It does not attempt to describe all possible federal or other tax consequences of participation in the Incentive Plan or tax consequences based on particular circumstances. The exact federal income tax treatment of transactions under the Incentive Plan will vary depending upon the specific facts and circumstances involved and participants are advised to consult their personal tax advisors with regard to all consequences arising from the grant or exercise of awards and the disposition of any acquired shares.

Incentive Stock Options. Incentive stock options under the Incentive Plan are intended to be eligible for the favorable tax treatment accorded “incentive stock options” under the Code. There generally are no federal income tax consequences to the participant or Mtron by reason of the grant or exercise of an incentive stock option. However, the exercise of an incentive stock option may increase the participant’s alternative minimum tax liability, if any.

If a participant holds stock acquired through exercise of an incentive stock option for at least two (2) years from the date on which the option is granted and at least one (1) year from the date on which the shares are transferred to the participant upon exercise of the option, any gain or loss on a disposition of such stock will be treated for tax purposes as long-term capital gain or loss.

Generally, if the participant disposes of the stock before the expiration of either of these holding periods (a “disqualifying disposition”), then at the time of disposition the participant will recognize taxable ordinary income equal to the lesser of (a) the excess of the stock’s fair market value on the date of exercise over the exercise price, or (b) the participant’s actual gain, if any, on the purchase and sale. The participant’s additional gain (or any loss) upon the disqualifying disposition will be a capital gain (or loss), which will be long-term or short-term depending on whether the stock was held for more than one (1) year.

To the extent the participant recognizes ordinary income by reason of a disqualifying disposition, Mtron will generally be entitled to a corresponding business expense deduction in the tax year in which the disqualifying disposition occurs, subject to Section 162(m) of the Code.

Non-qualified Stock Options, Restricted Stock Awards, Restricted Stock Units, and Deferred Stock. Non-qualified stock options, restricted stock awards, restricted stock units and deferred stock granted under the Incentive Plan generally have the following federal income tax consequences:

There are no tax consequences to the participant or Mtron by reason of the grant of a non-qualified stock option. Upon exercise of the option, the participant ordinarily will recognize taxable ordinary income equal to the excess, if any, of the stock’s fair market value on the exercise date over the exercise price. If the stock received pursuant to the exercise is subject to further vesting requirements, the taxable event will be delayed until the vesting restrictions lapse unless the participant elects under Section 83(b) of the Code to be taxed on receipt of the stock.

There are no tax consequences to the participant or Mtron by reason of the grant of restricted stock, restricted stock units or deferred stock awards. The participant ordinarily will recognize taxable ordinary income equal to the excess, if any, of the stock’s fair market value over the purchase price, if any, when such award vests. Under certain circumstances, the participant may be permitted to elect under Section 83(b) of the Code to be taxed on the grant date.

With respect to employees, Mtron is generally required to withhold from regular wages or supplemental wage payments an amount based on the ordinary income recognized. Mtron will generally be entitled to a business expense deduction equal to the taxable ordinary income realized by the participant, subject to Section 162(m) of the Code.

Upon disposition of the stock, the participant will generally recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock (if any) plus any amount recognized as ordinary income upon acquisition (or vesting) of the stock. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one (1) year.

65

 

 

---

 

Stock Appreciation Rights. No taxable income is generally recognized upon the receipt of a SAR, but upon exercise of the SAR, the fair market value of the shares (or cash in lieu of shares) received generally will be taxable as ordinary income to the recipient in the year of such exercise. Mtron generally will be entitled to a compensation deduction for the same amount which the recipient recognizes as ordinary income, subject to Section 162(m) of the Code.

Performance Awards. A participant who has been granted a performance award generally will not recognize taxable income at the time of grant, and Mtron will not be entitled to a deduction at that time. When an award is paid, whether in cash or common shares, the participant generally will recognize ordinary income, and Mtron will be entitled to a corresponding deduction, subject to Section 162(m) of the Code.

Stock Payments and Other Stock-Based Awards. A participant who receives a stock payment in lieu of a cash payment that would otherwise have been made will generally be taxed as if the cash payment has been received, and Mtron generally will be entitled to a deduction for the same amount, subject to Section 162(m) of the Code.

Section 409A of the Code. Most of the awards under the Incentive Plan are exempt from Section 409A of the Code. To the extent that any award hereunder could be subject to Section 409A of the Code, it will be structured to comply with Section 409A of the Code.

Section 162(m) of the Code. The Tax Reform and Jobs Act of 2017 (the “Tax Act”) generally eliminated the ability to deduct compensation qualifying for the “performance-based compensation” exception under Section 162(m) of the Code for tax years commencing after December 31, 2017. Section 162(m) of the Code imposes a $1 million limit on the amount that a public company may deduct for compensation paid to anyone who has ever been Mtron’s chief executive officer, chief financial officer or one of the three highest compensated officers in any fiscal year beginning after December 31, 2016 (i.e., a “covered employee”). For 2017 and prior taxable years, an exception to this deduction limit applied to “performance-based compensation,” such as stock options and other equity awards that satisfied certain criteria. Under the Tax Act, the performance-based pay exception to Section 162(m) was eliminated, but a transition rule may allow the exception to continue to apply to certain performance-based compensation payable under written binding contracts that were in effect on November 2, 2017. The Board of Directors and the committee intend to consider the potential impact of Section 162(m) on grants made under the Incentive Plan, but reserve the right to approve grants of options and other awards for an executive officer that exceeds the deduction limit of Section 162(m).

New Plan Benefits

Grants of awards under the Incentive Plan will be at the discretion of the compensation committee.  It has not yet determined to whom and in what amount any future awards will be made.

Compensation Committee Interlocks and Insider Participation

None of the individuals expected to serve on our Compensation Committee following the spin-off are current or former officers or employees of Mtron or any of its subsidiaries.  In addition, Mtron is not aware of any interlocking or other relationships or transactions involving any such individuals required to be disclosed under Item 407(e)(4) of Regulation S-K promulgated by the SEC.

 

Director Compensation

It is anticipated that Mtron’s directors will be paid director compensation in the form of a cash retainer and awards of common stock as determined by the Compensation Committee.

66

 

 

---

 

 

Security Ownership of Certain Beneficial Owners and Management

Before the spin-off, all of the outstanding shares of our common stock will be owned beneficially and of record by the Company.  Immediately following the spin-off, the Company will not own any shares of our common stock.

The following table shows the anticipated beneficial ownership of Mtron Common Stock immediately following the spin-off by (i) each person who we believe, based on the assumptions described below, will beneficially own more than 5% of the outstanding shares of Mtron Common Stock, (ii) each of our executive officers, (iii) each person expected to serve as a director on our board of directors immediately following the spin-off, and (iv) all of our expected directors and executive officers immediately following the spin-off as a group.  Except as otherwise noted in the footnotes below, (i) each person named in the table below is expected to have sole voting and investment power over the shares of Mtron Common Stock expected to be beneficially owned by such person and (ii) the address of each person named in the table below is 2525 Shader Road, Orlando FL, 32804 unless indicated below.

 

67

 

 

---

 

 

Description of Capital Stock

Our certificate of incorporation and bylaws will each be amended and restated prior to the distribution date.  The following is a summary of the material terms of our capital stock that will be contained in our amended and restated certificate of incorporation and amended and restated bylaws.  The terms of our capital stock may also be affected by Delaware law.  The following summary does not purport to be complete and is subject to, and qualified in its entirety by reference to, our amended and restated certificate of incorporation and amended and restated bylaws, each of which is included as an exhibit to the registration statement on Form 10, of which this information statement is a part.  See “Where You Can Find More Information.”

Authorized Capital Stock

Under our certificate of incorporation, the total number of shares of all classes of stock that Mtron will have authority to issue will be 30,000,000, consisting of 25,000,000 shares of common stock and 5,000,000 shares of preferred stock.

Common stock

Based on the number of shares of the Company’s common stock expected outstanding as of the record date, Mtron expects that 2,702,735 shares of Mtron Common Stock will be distributed in the spin-off.  However, the actual number of shares of Mtron Common Stock to be distributed in the spin-off will be determined based on the actual number of shares of the Company’s common stock outstanding as of the record date.  The shares of Mtron Common Stock distributed in the spin-off will constitute all of the issued and outstanding shares of our capital stock immediately following the distribution.

Mtron may issue additional authorized shares of Mtron Common Stock as authorized by our board of directors from time to time, without stockholder approval, subject to any limitations imposed by the listing standards of any national securities exchange on which Mtron Common Stock may be listed.

Voting Rights

Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Under our amended and restated certificate of incorporation, our stockholders will not have cumulative voting rights. Because of this, the holders of a majority of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election.

Dividend Rights

Subject to preferences that may apply to any then-outstanding preferred stock, the holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by the board of directors out of legally available funds. We do not anticipate paying any cash dividends in the foreseeable future.

Liquidation Rights

In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then-outstanding shares of preferred stock.

Preemptive or Similar Rights

All of our outstanding shares of Mtron Common Stock currently held by the Company are, and all of the shares of Mtron Common Stock that will be issued in connection with the spin-off will, be fully paid and nonassessable.  The holders of Mtron Common Stock have no preemptive rights, and Mtron Common Stock is not subject to any redemption or sinking fund provisions.

Preferred Stock

Under our certificate of incorporation our board of directors may, without further action by our stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of 5,000,000 shares of preferred stock in one or more series and authorize their issuance. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of common stock. Any issuance of preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders would receive dividend payments.

68

 

 

---

 

Certain Anti-Takeover Effects

Section 203 of the Delaware General Corporation Law

Mtron will be subject to Section 203 of the Delaware General Corporation Law (“DGCL”), which generally prohibits a publicly held Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, with the following exceptions:

In general, Section 203 defines a “business combination” to include the following:

In general, Section 203 defines an “interested stockholder” as an entity or person who, together with the person’s affiliates and associates, beneficially owns or within three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstanding voting stock of the corporation.

A Delaware corporation may “opt out” of these provisions with an express provision in its original certificate of incorporation or an express provision in its amended and restated certificate of incorporation or amended and restated bylaws resulting from a stockholders’ amendment approved by at least a majority of the outstanding voting shares. Mtron has not opted out of these provisions. As a result, mergers or other takeover or change in control attempts of us may be discouraged or prevented.

Certificate of Incorporation and Bylaws

Among other things, our certificate of incorporation and bylaws:

permits our board of directors to issue up to 5,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change of control;  

•permits our board of directors to issue up to 5,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change of control;  

•

provide that the authorized number of directors may be changed only by resolution of our board of directors;

•

provide that, subject to the rights of any series of preferred stock to elect directors, directors may only be removed in the manner specified in Section 141(k) of the DGCL;

•

provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum, or by the sole remaining director;

•

require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent or electronic transmission;

•

provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide advance notice in writing, and also specify requirements as to the form and content of a stockholder’s notice;

69

 

 

---

 

•

provide that special meetings of our stockholders may be called by (i) the chairperson of the board of directors, (ii) the chief executive officer or (iii) a majority vote of the board of directors, and by the secretary upon written request of stockholders representing  at least 25% of all votes entitled to be voted on the matter to be voted on; and

•

not provide for cumulative voting rights, therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose.

The amendment of any of these provisions would require approval by the holders of at least a majority of the voting power of all of our then-outstanding capital stock entitled to vote generally in the election of directors, voting together as a single class.

The combination of these provisions will make it more difficult for our existing stockholders to replace our board of directors as well as for another party to obtain control of us by replacing our board of directors. Since our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change our control.

These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to reduce our vulnerability to hostile takeovers and to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and may have the effect of delaying changes in our control or management. As a consequence, these provisions may also inhibit fluctuations in the market price of our stock.

Exclusive Forum Provision

Our certificate of incorporation will contain an exclusive forum provision which provides that, unless our board of directors consents to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery of the State of Delaware lacks jurisdiction over an action or proceeding, then another court of the State of Delaware or, if no court of the State of Delaware has jurisdiction, then the United States District Court for the District of Delaware) will be the sole and exclusive forum for “Covered Proceedings,” which include: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees, agents and stockholders to Mtron or its stockholders; (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”), our certificate of incorporation or bylaws; and (iv) any action asserting a claim governed by the internal affairs doctrine of the State of Delaware.  The exclusive forum provision will also provide that if any Covered Proceeding is filed in a court other than a court located within the State of Delaware in the name of any stockholder, then such stockholder shall be deemed to have consented to (a) the personal jurisdiction of the state and federal courts located within the State of Delaware in connection with any action brought in any such court to enforce the exclusive forum provision and (b) having service of process made upon such stockholder in any such enforcement action by service upon such stockholder’s counsel in the action as agent for such stockholder.

Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provision of our certificate of incorporation will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction.  Investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the federal district courts of the United States of America will be the exclusive forum for the resolution any complaint asserting a cause of action arising under the Securities Act. Any person or entity holding, owning or otherwise acquiring any interest in any security of Mtron will be deemed to have notice of and to have consented to the exclusive forum provision in our certificate of incorporation.

The exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with Mtron or its directors, officers or other employees or be cost-prohibitive to stockholders, which may discourage such lawsuits against Mtron and its directors, officers and other employees.  While the Delaware courts have determined that such choice of forum provisions are facially valid, there is uncertainty regarding whether a court would enforce the exclusive forum provision and a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum. In such instance, we would expect to assert vigorously the validity and enforceability of the exclusive forum provisions of our certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions. If a court were to find the exclusive forum provision to be

70

 

 

---

 

inapplicable or unenforceable in an action, Mtron may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our financial condition and operating results.

Transfer Agent and Registrar

After the distribution, we expect that the transfer agent and registrar for the Mtron Common Stock will be Computershare. The transfer agent’s address and contact information is as follows:

Computershare

211 Quality Circle, Suite 210

College Station, TX 77845

Toll free number: (877) 868-8027

TDD Hearing Impaired: (800) 952-9245

Foreign Stockholders: (201) 680-6578

TDD Foreign Stockholders: (781) 575-4592

Listing and Trading of Our Common Stock

As of the date of this information statement, there is no public market for our common stock.  We intend to list Mtron Common Stock on the NYSE American under the symbol “MPTI”.  The Company expects that the Mtron Common Stock will be listed on the NYSE American on or promptly after the distribution date.

Limitation on Liability and Indemnification of Directors and Officers

The DGCL authorizes corporations to limit or eliminate the personal liability of directors of corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties, subject to certain exceptions. Our certificate of incorporation includes a provision that eliminates the personal liability of directors for damages for any breach of fiduciary duty as a director except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL as the same exists or may hereafter be amended.

Our bylaws provide that we must indemnify and advance expenses to our directors and officers to the fullest extent authorized by the DGCL. We also expressly authorized to carry directors’ and officers’ liability insurance providing indemnification for our directors, officers, and certain employees for some liabilities. We will enter into indemnification agreements to indemnify our directors, executive officers and other employees as determined by the board of directors. These agreements will provide for indemnification for related expenses including attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding as a result of their services to the Company, cover procedures for advancement of legal fees, include provisions as to the manner of indemnification entitlement determinations and require us to maintain directors’ and officers’ insurance. We expect to maintain customary directors’ and officers’ liability insurance. We believe that these indemnification and advancement provisions and insurance are useful to attract and retain qualified directors and executive officers.

The limitation of liability, advancement and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing lawsuit against directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officer pursuant to these indemnification provisions.

To the extent our directors and officers are indemnified against liabilities arising under the Securities Act, whether under the provisions contained in certificate of incorporation or bylaws or pursuant to Delaware law or other contractual arrangements providing for indemnification which we may enter into from time to time, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable

Sale of Unregistered Securities

In connection with the distribution, we will effectuate a forward stock split of the outstanding shares of our common stock held by the Company, which shares will be distributed to the Company's stockholders by means of the distribution. We do not intend to register the issuance of the shares under the Securities Act because the issuance will not constitute a public offering.

71

 

 

---

 

Where You Can Find More Information

Mtron has filed a registration statement on Form 10 with the SEC with respect to the shares of Mtron Common Stock that the stockholders of the Company will receive in the distribution.  This information statement is a part of that registration statement and, as allowed by SEC rules, does not include all of the information that you can find in the registration statement or in the exhibits to the registration statement.  For additional information relating to us and the spin-off, we refer you to the registration statement and its exhibits, which are available from the SEC as described below.  Statements contained in this information statement as to the contents of any contract or document referred to are not necessarily complete and in each instance, if the contract or document is filed as an exhibit to the registration statement, we refer you to the copy of the contract or other document so filed.  Mtron qualifies each statement in all respects by the relevant reference.

Mtron will maintain a website at www.mtronpti.com.  Our website and the information contained on or connected to that site do not and will not constitute part of, and are not incorporated into, this information statement or the registration statement on Form 10, of which this information statement is a part.

As a result of the distribution, Mtron will become subject to the information and reporting requirements of the Exchange Act and, accordingly, it will file annual, quarterly and current reports, proxy statements and other information with the SEC.  The registration statement referred to above, including its exhibits, is, and our future filings with the SEC will be, available to the public on the Internet website maintained by the SEC at www.sec.gov.  In addition, Mtron plans to make available, free of charge, on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed under Section 16 of the Exchange Act and amendments to those reports as soon as reasonably practicable after we electronically file or furnish those materials to the SEC.

Mtron intends to furnish holders of Mtron Common stock with annual reports containing consolidated financial statements prepared in accordance with GAAP and audited and reported on, with an opinion expressed, by an independent registered public accounting firm.

You should rely only on the information contained in this information statement or in the documents incorporated by reference herein. Mtron has not authorized any person to provide you with different information or to make any representation not contained in, or incorporated by reference into, this information statement and, if given or made, such information or representation must not be relied upon as having been authorized by Mtron or the Company.  Neither the delivery of this information statement nor consummation of the spin-off shall under any circumstances create any implication that there has been no change in our affairs or those of the Company since the date of this information statement, or that the information in this information statement is correct as of any time after its date.

 

72

 

 

---

 

 

MTRON BUSINESS OF LGL GROUP, INC.  

Index to Combined Financial Statements

TABLE OF CONTENTS

Year Ended December 31, 2021

 

		Page
Report of Independent Registered Public Accounting Firm		F-2
Combined Balance Sheets as of December 31, 2021 and 2020		F-3
Combined Statements of Operations for the years ended December 31, 2021 and 2020		F-4
Combined Statements of Equity for the years ended December 31, 2021 and 2020		F-5
Combined Statements of Cash Flows for the years ended December 31, 2021 and 2020		F-6
Notes to Combined Financial Statements		F-7

 Three and Six Months Ended June 30, 2022

		Page
Financial Statements
Condensed Combined Balance Sheets as of June 30, 2022 (unaudited), December 31, 2021, and June 30, 2021 (unaudited)		F-19
Condensed Combined Statements of Operations for the three and six months ended June 30, 2022 and 2021 (unaudited)		F-20
Condensed Combined Statements of Equity for the three and six months ended June 30, 2022 and 2021 (unaudited)		F-21
Condensed Combined Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited)		F-22
Notes to Condensed Combined Financial Statements (unaudited)		F-23

 

F-1

---

 

 

Report of Independent Registered Public Accounting Firm

 

 

Shareholders and the Board of Directors

LGL Group, Inc.

 

 

Opinion on the Financial Statements

We have audited the accompanying combined balance sheets of the Mtron business of the LGL Group, Inc. (the Company) as of December 31, 2021 and 2020, the related combined statements of operations, equity and cash flows, for the years then ended, and the related notes to the combined financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Emphasis of Matter

As described in Note B to the combined financial statements, the accompanying combined financial statements have been prepared from the separate records maintained by the Company. The combined financial statements also include expense allocations for certain corporate functions historically provided by the LGL Group, Inc. These allocations may not be reflective of the actual expense that would have been incurred had the Company operated as a separate entity apart from the LGL Group, Inc. A summary of transactions with related parties is included in Note C to the combined financial statements.

 

 

/s/ RSM US LLP

 

 

We have served as the Company’s auditor since 2020.

 

Orlando, Florida

April 11, 2022   

F-2

 

---

 

MTRON BUSINESS OF THE LGL GROUP, INC.

COMBINED BALANCE SHEETS

(Dollars in Thousands)

 

		December 31,
		2021				2020
ASSETS
Current Assets:
Cash and cash equivalents		$	2,635			$	2,456
Accounts receivable, net of allowances of $131 and $117, respectively			3,995				3,948
Inventories, net			5,221				5,105
Prepaid expenses and other current assets			242				233
Total Current Assets			12,093				11,742
Property, Plant and Equipment
Land			536				536
Buildings and improvements			4,869				4,810
Machinery and equipment			18,176				17,135
Gross property, plant and equipment			23,581				22,481
Less:  accumulated depreciation			(20,199	)			(19,710	)
Net property, plant and equipment			3,382				2,771
Right-of-use lease asset			218				203
Due from related party			1,969				286
Intangible assets, net			152				206
Deferred income tax asset			2,187				2,694
Other assets			5				16
Total Assets		$	20,006			$	17,918
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable		$	1,396			$	1,209
Accrued compensation and commissions expense			1,213				1,111
Other accrued expenses			403				492
Total Current Liabilities			3,012				2,812
Long-term lease liability			145				132
Total Liabilities			3,157				2,944
Contingencies (Note L)
Equity
Net investment by LGL Group, Inc.			16,849				14,974
Total Equity			16,849				14,974
Total Liabilities and Equity		$	20,006			$	17,918

 

See Accompanying Notes to Combined Financial Statements.

F-3

 

---

 

MTRON BUSINESS OF THE LGL GROUP, INC.

COMBINED STATEMENTS OF OPERATIONS

(Dollars in Thousands)

 

		Year Ended December 31,
		2021				2020
REVENUES		$	26,694			$	29,984
Costs and expenses:
Manufacturing cost of sales			17,358				19,688
Engineering, selling and administrative			7,222				7,266
OPERATING INCOME			2,114				3,030
Other Expense:
Interest expense, net			(12	)			(86	)
Other expense, net			11				(51	)
Total other expense, net			(1	)			(137	)
INCOME BEFORE INCOME TAXES			2,113				2,893
Income tax provision			531				583
NET INCOME		$	1,582			$	2,310

 

See Accompanying Notes to Combined Financial Statements.

F-4

 

---

 

MTRON BUSINESS OF THE LGL GROUP, INC.

COMBINED STATEMENTS OF EQUITY

(Dollars in Thousands)

 

		Net Investment by LGL Group
Balance at December 31, 2019		$	12,787
Net income			2,310
Net transfers to LGL Group, Inc.			(123	)
Balance at December 31, 2020		$	14,974
Net income			1,582
Net transfers from LGL Group, Inc.			293
Balance at December 31, 2021		$	16,849

 

See Accompanying Notes to Combined Financial Statements.

F-5

 

---

 

MTRON BUSINESS OF THE LGL GROUP, INC.

COMBINED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

 

		Year Ended December 31,
		2021				2020
OPERATING ACTIVITIES
Net income		$	1,582			$	2,310
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			488				435
Amortization of finite-lived intangible assets			54				54
Stock-based compensation expense			292				145
Deferred income tax expense			507				491
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net			(47	)			215
(Increase) decrease in inventories, net			(116	)			718
Decrease (increase) in prepaid expenses and other assets			2				(24	)
Increase (decrease) in accounts payable, accrued compensation    and commissions expense and other			198				(438	)
Net cash provided by operating activities			2,960				3,906
INVESTING ACTIVITIES
Capital expenditures			(1,099	)			(407	)
Net cash used in investing activities			(1,099	)			(407	)
FINANCING ACTIVITIES
Net transfers from (to) LGL Group, Inc.			1				(268	)
Payments to related party			(1,683	)			(320	)
Repayment of LGL Group, Inc. loan			—				(3,323	)
Net cash used in financing activities			(1,682	)			(3,911	)
Increase (decrease) in cash and cash equivalents			179				(412	)
Cash and cash equivalents at beginning of year			2,456				2,868
Cash and cash equivalents at end of year		$	2,635			$	2,456

See Accompanying Notes to Combined Financial Statements.

F-6

 

---

 

MTRON BUSINESS OF THE LGL GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

A. Description of Business

MTron Industries, Inc. (the “Company”, “we”, “our” or “us”) was founded in 1965 and is engaged in the design, manufacturing and marketing of highly-engineered, high reliability frequency and spectrum control products used to control the frequency or timing of signals in electronic circuits.

The Company’s operations include its two principal subsidiaries, (1) Piezo Technology, Inc. ("PTI") and (2) M-tron Asia, LLC ("Mtron"). The Company has operations in Orlando, Florida; Yankton, South Dakota; and Noida, India, and has sales offices in Austin, Texas and Hong Kong. The Company and its subsidiaries currently operate together as a single group under the MtronPTI brand (“Mtron PTI”).

The Company offers a wide range of precision frequency control and spectrum control solutions including: RF, microwave and millimeter wave filters; cavity, crystal, ceramic, lumped element and switched filters; high performance and high frequency OCXOs, integrated PLL OCXOs, TCXOs, VCXOs, low jitter and harsh environment oscillators; crystal resonators, Integrated Microwave Assemblies (IMA); and state-of-the-art solid state power amplifier products.

B. Summary of Significant Accounting Policies

Basis of Presentation

The combined financial statements include the accounts of the Company and all of its majority-owned subsidiaries. Intercompany transactions and accounts have been eliminated. The combined financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

The combined financial statements have been derived from the consolidated financial statements and accounting records of The LGL Group, Inc. (“LGL Group”) and have been prepared under GAAP. These combined financial statements may not be indicative of the Company’s future performance and do not necessarily reflect what the financial position, results of operations, and cash flows would have been had it operated as an independent company during the periods presented.

Transactions between the Company and LGL Group have been included in these combined financial statements. For those transactions between the Company and LGL Group that have been historically settled in cash, the Company has reflected such balances in the Combined Balance Sheets as Due from Related Parties or Due to Related Parties. The aggregate net effect of transactions between the Company and related parties that have been historically settled other than in cash are reflected in the Combined Balance Sheets as Net Investment by LGL Group, Inc. and in the Combined Statements of Cash Flows as Net Transfers to LGL Group, Inc. For additional information, see Note C – Related Party Transactions.

The Combined Balance Sheets include certain LGL Group assets and liabilities that are specifically identifiable or otherwise attributable to the Company. The debt and associated interest expense in these combined financial statements relate to third-party borrowings under a revolving credit agreement specifically attributable to legal obligations of the Company.

The Cash and Cash Equivalents held by LGL Group at the corporate level are not specifically identifiable to the Company and, therefore, have not been reflected in the Company’s Combined Balance Sheets. Cash and Cash Equivalents in the Combined Balance Sheets represent Cash and Cash Equivalents held by the Company at the respective period-ends.

The Combined Statements of Operations include an allocation for certain corporate and shared service functions historically provided by our Parent, including, but not limited to, executive oversight, accounting, tax, and other shared services. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of consolidated sales or other measures considered to be a reasonable reflection of the historical utilization levels of these services. Management believes the assumptions underlying our combined financial statements, including the assumptions regarding the allocation of general corporate expenses from our Parent, are reasonable. Nevertheless, our combined financial statements may not include all of the actual expenses that would have been incurred had we operated as a standalone company during the periods presented and may not reflect our combined results of operations, financial position and cash flows had we operated as a standalone company during the periods presented. Actual costs that would have been incurred if we had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.

Going forward, the Company may perform these functions using its own resources or outsourced services. For a period following the planned separation, some of these functions may continue to be provided by LGL Group under a transition services agreement, and the Company may provide some services to LGL Group under the transition services agreement. The Company may also enter into certain

F-7

 

---

 

commercial arrangements with LGL Group in connection with the planned separation. We also may incur additional costs associated with being a standalone, publicly listed company that were not included in the expense allocations and, therefore, would result in additional costs that are not reflected in our historical results of operations, financial position and cash flows.

During the period presented in these Combined Financial Statements, the Company’s income tax expense and deferred tax balances have been included in the LGL Group’ income tax returns. Income tax expense and deferred tax balances contained in the Combined Financial Statements are presented on a separate return basis, as if the Company had filed its own income tax returns. As a result, actual tax transactions included in the consolidated financial statements of LGL Group may or may not be included in the Combined Financial Statement of the Company. Similarly, the tax treatment of certain items reflected in the Combined Financial Statement of the Company may or may not be reflected in the consolidated financial statements and income tax returns of LGL Group. The taxes recorded in the Combined Statements of Operations are not necessarily representative of the taxes that may arise in the future if the Company files its income tax returns independent from LGL Group’ returns.

Uses of Estimates

The preparation of the combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly-liquid investments with no maturity or with a maturity of less than three months when purchased.

Accounts Receivable

Accounts receivable consists principally of amounts due from both domestic and foreign customers. Credit is extended based on an evaluation of the customer's financial condition and collateral is not required. In relation to export sales, the Company requires letters of credit supporting a significant portion of the sales price prior to production to limit exposure to credit risk. Certain credit sales are made to industries that are subject to cyclical economic changes. 

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. These allowances are maintained at a level that management believes is sufficient to cover potential credit losses. Estimates are based on historical collection experience, current trends, credit policy and the relationship between accounts receivable and revenues. In determining these estimates, the Company examines historical write-offs of its receivables and reviews each customer's account to identify any specific customer collection issues. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payment, additional allowances might be required. 

Inventories

Inventories are valued at the lower of cost or net realizable value using the FIFO (first-in, first-out) method.

The Company maintains a reserve for inventory based on estimated losses that result from inventory that becomes obsolete or for which the Company has excess inventory levels. In determining these estimates, the Company performs an analysis on current demand and usage for each inventory item over historical time periods. Based on that analysis, the Company reserves a percentage of the inventory amount within each time period based on historical demand and usage patterns of specific items in inventory.

Property, Plant and Equipment, Net

Property, plant and equipment are recorded at cost less accumulated depreciation and include expenditures for major improvements. Maintenance and repairs are charged to operations as incurred. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets, which range from 5 years to 35 years for buildings and improvements, and from 3 years to 10 years for other fixed assets. Property, plant and equipment are periodically reviewed for indicators of impairment. If any such indicators were noted, the Company would assess the appropriateness of the assets' carrying value and record any impairment at that time.

Depreciation expense was approximately $488,000 and $435,000 for the years ended December 31, 2021 and 2020, respectively.

F-8

 

---

 

Intangible Assets

Intangible assets are recorded at cost less accumulated amortization. Amortization is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the assets, which range up to 10 years. The intangible assets consist of intellectual property and goodwill. The net carrying value of the intangible assets was $112,000 and $166,000 as of December 31, 2021 and 2020, respectively. Goodwill, which is not amortizable, was $40,000 as of December 31, 2021 and 2020.

The estimated aggregate amortization expense for intangible assets, excluding goodwill, for each of the remaining years of the estimated useful life is as follows (in thousands):

2022			54
2023			54
2024			4
Total		$	112

Warranties

The Company offers a standard one-year warranty. The Company tests its products prior to shipment in order to ensure that they meet each customer's requirements based upon specifications received from each customer at the time its order is received and accepted. The Company's customers may request to return products for various reasons, including, but not limited to, the customers' belief that the products are not performing to specification. The Company's return policy states that it will accept product returns only with prior authorization and if the product does not meet customer specifications, in which case the product would be replaced or repaired. To accommodate the Company's customers, each request for return is reviewed; and if and when it is approved, a return materials authorization ("RMA") is issued to the customer.

Each month, the Company records a specific warranty reserve for approved RMAs covering products that have not yet been returned. The Company does not maintain a general warranty reserve because, historically, valid warranty returns resulting from a product not meeting specifications or being non-functional have been de minimis. As of December 31, 2021 and 2020, accrued warranty reserve was $80,000 and $21,000, respectively.

Revenue Recognition

The Company recognizes revenue from the sale of its products in accordance with the criteria in Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which are:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The Company meets these conditions upon the Company’s satisfaction of the performance obligation, usually at the time of shipment to the customer, because control passes to the customer at that time. Our standard terms for customers are net due within 30 days, with a few exceptions, none regularly exceeding 60 days.

The Company provides disaggregated revenue details by geographic markets in Note M – Domestic and Foreign Revenues.

The Company offers a limited right of return and/or authorized price protection provisions in its agreements with certain electronic component distributors who resell the Company's products to original equipment manufacturers or electronic manufacturing services companies. As a result, the Company estimates and records a reserve for future returns and other charges against revenue at the time of shipment consistent with the terms of sale. The reserve is estimated based on historical experience with each respective distributor. These reserves and charges are immaterial as the Company does not have a history of significant price protection adjustments or returns. The Company provides a standard assurance warranty that does not create a performance obligation.

Practical Expedients:

-

The Company applies the practical expedient for shipping and handling as fulfillment costs.

-

The Company expenses sales commissions as sales and marketing expenses in the period they are incurred.

Shipping Costs

Amounts billed to customers related to shipping and handling are classified as revenue, and the Company's shipping and handling costs are included in manufacturing cost of sales.

F-9

 

---

 

Research and Development Costs

Research and development costs are charged to operations as incurred. Such costs were approximately $2,006,000 and $2,036,000 for the years ended December 31, 2021 and 2020, respectively, and are included within engineering, selling and administrative expenses.

Stock-Based Compensation

Certain Company employees participate in the share-based compensation plans sponsored by LGL Group. LGL Group’s share-based compensation awards granted to employees of the Company consist of LGL Group stock options and restricted stock. As such, the awards to Company employees are reflected in Net Investment by LGL Group, Inc. within the Combined Statements of Equity at the time they are expensed. The Combined Statements of Operations also includes an allocation of LGL’s corporate and shared employee share-based compensation expenses.

The Company measures the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and recognizes the cost over the requisite service period, typically the vesting period.

Restricted stock awards are measured at the market price of the LGL Group's common stock on the date of the grant and recognized over the respective service period.

Income Taxes

The Company's deferred income tax assets represent (a) temporary differences between the financial statement carrying amount and the tax basis of existing assets and liabilities that will result in deductible amounts in future years and (b) the tax effects of net operating loss carryforwards.

The Company periodically undertakes a review of its valuation allowance, and it evaluates all positive and negative factors that may affect whether it is more likely than not that the Company would realize its future tax benefits from its deferred tax balances. Pursuant to ASC 740, Income Taxes (“ASC 740”), the Company determined, during the year ended December 31, 2021, that it is more likely than not that substantially all of its U.S. deferred tax assets related to research and development tax credits can be utilized in the foreseeable future and that a previously recorded valuation allowance, amounting to $374,000, be reversed to record deferred tax assets at their expected net realizable value.

We recognize tax benefits related to uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by taxing authorities. For those positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. For the year ended December 31, 2021, we recorded unrecognized tax benefits of $448,000.

Historically, the Company’s income tax expense and deferred tax balances have been included in the LGL Group’s income tax returns. See Note E – Income Taxes, for further information regarding income taxes.

Concentration Risks

In 2021, the Company's largest customer, a commercial aerospace and defense company, accounted for $7,838,000, or 29.4%, of the Company's total revenues, compared to $7,802,000, or 26.0%, of the Company’s total revenues in 2020. The Company’s second largest customer, a defense contractor, accounted for $3,138,000, or 11.8%, of the Company's total revenues, compared to $5,550,000, or 18.5%, of the Company’s total revenues in 2020.

A significant portion of the Company's accounts receivable is concentrated with a relatively small number of customers. As of December 31, 2021, four of the Company's largest customers accounted for approximately $2,568,000, or 62.3%, of accounts receivable. As of December 31, 2020, four of the Company's largest customers accounted for approximately $2,301,000, or 57.1%, of accounts receivable. The Company carefully evaluates the creditworthiness of its customers in deciding to extend credit and utilizes letters of credit to further limit credit risk for export sales. As a result of these policies, the Company has experienced very low historical bad debt expense and believes the related risk to be minimal.

At various times throughout the year and at December 31, 2021 and 2020, some deposits held at financial institutions were in excess of federally insured limits. The Company has not experienced any losses related to these balances.

F-10

 

---

 

Segment Information

ASC 280, Segment Information ("ASC 280") requires companies to report financial and descriptive information for each identified operating segment based on management's internal organizational decision-making structure. Management has identified the Company’s only segment as electronic components.

Impairments of Long-Lived Assets

Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Long-lived assets are grouped with other assets to the lowest level to which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Management assesses the recoverability of the carrying cost of the assets based on a review of projected undiscounted cash flows. If an asset is held for sale, management reviews its estimated fair value less cost to sell. Fair value is determined using pertinent market information, including appraisals or broker's estimates, and/or projected discounted cash flows. In the event an impairment loss is identified, it is recognized based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset.

The Company reviews goodwill annually and the carrying value of long-lived assets whenever events and circumstances indicate that the carrying amounts of the assets may not be recoverable. If it is determined that the assets are impaired, the carrying value would be reduced to estimated recoverable value.

Impacts of COVID-19

We performed an assessment to determine if there were any indicators of impairment as a result of the operating conditions resulting from the coronavirus (“COVID-19”) pandemic at the end of each of the 2020 and 2021 fiscal quarters, including at December 31, 2021. We concluded that, while there were events and circumstances in the macro-environment that did impact us, we did not experience any entity-specific indicators of asset impairment and no triggering events occurred.

Net Investment by LGL Group, Inc.

Net investment by LGL Group, Inc. in the Combined Balance Sheets is presented in lieu of stockholders’ equity and represents LGL Group’s historical investment in the Company, the accumulated net earnings after taxes and the net effect of the transactions with and allocations from LGL Group. All transactions reflected in Net Investment by LGL Group, Inc. in the accompanying Combined Balance Sheets have been considered as financing activities for purposes of the Combined Statements of Cash Flows.

For additional information, see Basis of Presentation above and Note C – Related Party Transactions.

Financial Instruments

Cash and cash equivalents, trade accounts receivable, trade accounts payable and accrued expenses are carried at cost which approximates fair value due to the short-term maturity of these instruments.

Foreign Currency Translation

The assets and liabilities of international operations are remeasured at the exchange rates in effect at the balance sheet date for monetary assets and liabilities and at historical rates for nonmonetary assets and liabilities, with the related remeasurement gains or losses reported within the combined statements of operations. The results of international operations are remeasured at the monthly average exchange rates. The Company's foreign subsidiaries and respective operations' functional currency is the U.S. dollar. The Company has determined this based upon the majority of transactions with customers as well as intercompany transactions and parental support being based in U.S. dollars. The Company has recognized a remeasurement gain (loss) of $11,000 and ($95,000) in 2021 and 2020, respectively, which is included within other income, net in the Combined Statements of Operations.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value guidance identifies three primary valuation techniques: the market approach, the income approach and the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset.

F-11

 

---

 

The Company estimates the fair value of property and equipment and trade name in accordance with the provisions of ASC 820. The recorded amounts for cash and cash equivalents, accounts receivable, prepaid expenses, other current assets and current liabilities approximate fair value due to the short-term nature of these assets and liabilities.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to observable inputs such as quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The maximization of observable inputs and the minimization of the use of unobservable inputs are required.

Classification within the fair value hierarchy is based upon the objectivity of the inputs that are significant to the valuation of an asset or liability as of the measurement date. The three levels within the fair value hierarchy are characterized as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 - Unobservable inputs for the asset or liability for which there is little, if any, market activity for the asset or liability at the measurement date. Unobservable inputs reflect the Company's own assumptions about what market participants would use to price the asset or liability. These inputs may include internally developed pricing models, discounted cash flow methodologies as well as instruments for which the fair value determination requires significant management judgment.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13),” which changes the impairment model for most financial assets. The standard replaces the incurred loss model with the current expected credit loss (“CECL”) model to estimate credit losses for financial assets. The provisions of the standard are effective for the Company on January 1, 2023; early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its combined financial statements.

Other accounting standards that have been issued by the FASB or other standard-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s combined financial statements.

C. Related Party Transactions

The combined financial statements have been prepared on a standalone basis and are derived from the consolidated financial statements and accounting records of The LGL Group, Inc. The following discussion summarizes activity between the Company and LGL Group.

Allocation of General Corporate Expenses

For purposes of preparing these combined financial statements on a “carve-out” basis, we have allocated a portion of LGL Group’s corporate expenses, totaling $921,000 and $605,000 to the Company for the years ended December 31, 2021 and 2020, respectively, which are recorded within engineering, selling and administrative expenses. See Note B – Summary of Significant Accounting Policies for a discussion of the methodology used to allocate corporate-related costs for purposes of preparing these financial statements on a “carve-out” basis.

Due to and from Related Parties

Balances between the Company and LGL Group, Inc. that are derived from transactions that have been historically cash settled are reflected in the Combined Balance Sheets as Due to Related Parties. Balances between the Company and LGL Group, Inc. or its affiliates derived from transactions that have been historically settled other than in cash are included in Net Investment by LGL Group, Inc. within Equity on the Combined Balance Sheets.

Loan Payable to Related Party

The Company had a loan payable to LGL with a balance of $3,323,000 at December 31, 2019. This loan carried interest at an annual rate of 6.25%. Interest expense was $75,000 for the year ended December 31, 2020. The loan was repaid during 2020.

F-12

 

---

 

Net Transfers to LGL Group, Inc.

The following table presents the components of Net Transfers to LGL Group, Inc. in the 2021 and 2020 Combined Statements of Equity:

		2021				2020
Corporate Expense Allocations		$	29			$	(207	)
Share-based Compensation Expense			292				145
Assumed Income Tax Payments			(28	)			(61	)
Total Net Transfers to (from) LGL Group, Inc.		$	293			$	(123	)

D. Inventories

The Company reduces the value of its inventories to net realizable value when the net realizable value is believed to be less than the cost of the item. The inventory reserve for excess and obsolescence inventory as of December 31, 2021 and 2020 was $1,381,000 and $1,181,000, respectively. The components of inventory as of December 31, 2021 and 2020 are summarized below:

 

		December 31,
		2021				2020
		(in thousands)
Raw materials		$	2,061			$	1,907
Work in process			2,190				2,465
Finished goods			970				733
Total Inventories, net		$	5,221			$	5,105

E. Income Taxes

The Company periodically undertakes a review of its valuation allowance and evaluates all positive and negative factors that may affect whether it is more likely than not that the Company would realize its future tax benefits from its deferred tax balances. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable.

During 2021, as a result of current and expected future taxable income, the Company released its valuation allowance over a portion of its deferred tax assets as the deferred tax assets became more likely than not to be realized.

Income tax provision for the year ended December 31, 2021 and 2020 is as follows:

		2021				2020
		(in thousands)
Current:
Federal		$	—			$	—
State and local			23				38
Foreign			—				50
Total Current			23				88
Deferred:
Federal			455				443
State and local			52				20
Foreign			1				32
Net deferred			508				495
Income tax provision		$	531			$	583

F-13

 

---

 

 

A reconciliation of the provision for income taxes and the amount computed by applying the statutory federal income tax rate to income before income taxes is detailed below:

		2021				2020
		(in thousands)
Tax provision at expected statutory rate		$	444			$	608
State taxes, net of federal benefit			75				59
Permanent differences			3				55
Credits			(74	)			(125	)
Foreign tax expense, and other			(12	)			1
Change in rate			1				(25	)
Change in valuation allowance			(374	)			5
Change in uncertain tax positions			448				—
Other			20				5
Provision for income taxes		$	531			$	583
Effective tax rate			25.1	%			20.2	%

Deferred income taxes for 2021 and 2020 were provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Tax effects of temporary differences and carry-forwards at December 31, 2021 and 2020 were as follows:

		December 31, 2021								December 31, 2020
		Deferred Tax								Deferred Tax
		Asset				Liability				Asset				Liability
		(in thousands)
Inventory reserve		$	334			$	—			$	292			$	—
Fixed assets			—				44				—				61
Other reserves and accruals			181				—				222				—
Stock-based compensation			2				—				8				—
Other			—				15				—				20
Tax credit carryforwards			1,343				—				1,717				—
Federal tax loss carryforwards			204				—				682				—
State tax loss carryforwards			148				—				193				—
Foreign tax loss carryforwards			34				—				35				—
Total deferred income taxes			2,246			$	59				3,149			$	81
Valuation allowance			—								(374	)
Net deferred tax assets		$	2,187							$	2,694

Deferred tax assets totaled $2,187,000 at December 31, 2021 which includes the tax effect of federal, state and foreign net operating loss carryforwards and our federal tax credits. We recognize federal, state and foreign net operating loss carryforwards and our federal tax credits as deferred tax assets, subject to valuation allowances. At each balance sheet date, we estimate the amount of carryforwards that are not expected to be used prior to expiration of the carryforward period.

The Company has a total gross federal NOL carryforward of $973,000 as of December 31, 2021. This federal NOL carryforward expires through 2038, if not utilized prior to that date. The Company has total state NOL carryforwards of $3,400,000 as of December 31, 2021. These state NOL balances expire through 2038. The Company has research and development tax credit carryforwards of approximately $1,343,000 at December 31, 2021 that can be used to reduce future income tax liabilities and expire principally between 2022 and 2040.

For purposes of our combined financial statements, income taxes have been calculated as if we file income tax returns for the Company on a standalone basis. The Company’s U.S. operations and certain of its non-U.S. operations historically have been included in the income tax returns of LGL or its subsidiaries that may not be part of the Company. The Company believes the assumptions supporting its allocation and presentation of income taxes on a separate return basis are reasonable. Deferred tax assets totaling $1,354,000 and included in the above balances are expected to be utilized by LGL on its 2021 consolidated tax return, and would be deducted from the deferred tax asset balance and included in the Net investment by LGL Group, Inc. on the Company’s consolidated balance sheet and shown as Net transfers to LGL Group within the combined statements of equity.

F-14

 

---

 

Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. We review our tax contingencies on a regular basis and make appropriate accruals as necessary.

As of December 31, 2021, our unrecognized tax benefits totaled $448,000, and are included within other liabilities in our consolidated balance sheet. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

		2021
		(in thousands)
Balance at January 1		$	—
Additions for tax positions of prior years			419
Additions based on tax positions related to the current year			29
Balance at December 31		$	448

The Company will recognize any interest and penalties related to unrecognized tax positions in income tax expense. Net adjustments to accruals for interest and penalties associated with uncertain tax positions was immaterial for 2021. Our total accrued interest and penalties associated with uncertain tax positions were immaterial as of December 31, 2021. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $448,000. We do not expect a significant change to the amount of unrecognized tax benefits over the next 12 months. We believe that the taxes accrued in our consolidated balance sheet fairly represent the amount of income taxes to be settled or realized in the future.

The Company files income tax returns in the U.S. federal, various state, Hong Kong and India jurisdictions. The statute of limitations for assessment by the Internal Revenue Service ("IRS") and state tax authorities is open for tax returns for years ended December 31, 2018, 2019 and 2020; although carryforward attributes that were generated prior to tax year 2018, including NOL carryforwards and tax credits, may still be adjusted upon examination by the IRS or state tax authorities, if they either have been or will be used in a future period. The Company is generally subject to examinations by foreign tax authorities from 2016 to the present.

F. Revolving Credit Agreement

On May 12, 2020, the Company and its subsidiary PTI (collectively, the “Borrowers”), entered into a loan agreement for a revolving line of credit with Synovus Bank, an unaffiliated entity, as the lender (“Lender”), for up to $3.5 million (the “Loan Agreement”), such amount to be used for working capital and general operations. The Loan Agreement is evidenced by a promissory note dated May 12, 2020 that matures on May 12, 2022 (the “Note”) and a corresponding security agreement (the “Security Agreement”). The Note bears interest at the London Inter-bank Offered Rate (“LIBOR”) 30-day rate plus 2.50% with a floor of 0.50%. Upon discontinuance or lack of availability of the LIBOR rate, Lender is required to determine a comparable equivalent replacement rate. Accrued interest-only payments are due on a monthly basis until the maturity date. The Borrowers may prepay all or any portion of the loans under the Loan Agreement at any time, without fee, premium or penalty. The Loan Agreement also includes a clean-up provision; whereby, during each 12-month period, the outstanding balance must remain at zero for 30 consecutive days. In accordance with the Security Agreement, all property of the Borrowers, both tangible and intangible, will serve as security for borrowings under the Loan Agreement. At December 31, 2021 and 2020, the Company had no outstanding borrowings under its revolving line of credit with Synovus Bank.

The Loan Agreement contains various affirmative and negative covenants that are customary for lines of credit and transactions of this type which the Company is in compliance with, including limitations on the incurrence of debt and liabilities by the Borrowers, as well as financial reporting requirements. The Loan Agreement also imposes certain financial covenants based on Debt Service Coverage Ratio and the Ratio of Total Liabilities to Total Net Worth (as such terms are defined in the Loan Agreement). In the event of default, the Lender has the right to terminate its commitment to make loans pursuant to the Loan Agreement and to accelerate the payment on any unpaid principal amount of all outstanding loans and interest thereon. All loans pursuant to the Loan Agreement are secured by a continuing and unconditional first priority security interest in and to any and all property of the Borrowers.

G. Leases

We lease certain manufacturing and office space and equipment. We determine if an arrangement is a lease at inception. A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration. Amounts associated with operating leases, which are not short-term, are included in right-of-use lease assets, other accrued expenses and long-term lease liabilities in our Combined Balance Sheets. Right-of-use lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our incremental borrowing rate at the lease commencement date in determining the present value of lease payments. Short-term leases, leases with an initial term of 12 months or less, are not recorded in the Combined Balance Sheets; we recognize lease expense for these short-term leases on a straight-line basis over the lease term.

F-15

 

---

 

The Company leases certain property and equipment, including warehousing, and sales and distribution equipment, under operating leases with terms that range from one to five years. Certain of these leases have one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more, and the exercise of lease renewal options under these leases is at our sole discretion. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Total operating lease costs amounted to $476,000 and $546,000 for the years ended December 31, 2021 and 2020, respectively.

Our total lease obligation, as discounted for imputed interest, is $218,000 of which the current portion of $73,000 is included in other accrued expenses on the combined balance sheets at December 31, 2021.

Future minimum lease payment obligations under operating leases are as follows (in thousands):

		2021
2022			74
2023			74
2024			74
2025			12
Total lease payments			234
Less: interest			(16	)
Total lease payments		$	218

 

H. Stock-Based Compensation

On August 4, 2011, LGL Group’s stockholders approved the 2011 Incentive Plan. 500,000 shares of common stock were authorized for issuance under the 2011 Incentive Plan. On June 16, 2016, LGL Group’s stockholders approved the Amended and Restated 2011 Incentive Plan (the “Plan”) which increased the number of shares of common stock authorized for issuance under the Plan to 750,000 shares of common stock. On August 4, 2021, the 2011 Incentive Plan terminated. On December 28, 2021, LGL Group’s stockholders approved the 2021 Incentive Plan, including the authority to issue 1,000,000 shares of common stock. At December 31, 2021, 946,511 shares remained available for future issuance under the 2021 Incentive Plan.

Restricted stock awards are measured at a value equal to the market price of LGL Group's common stock on the date of grant which is recognized over the service period of the shares.

Total stock-based compensation expense recorded by LGL Group was $309,000 and $151,000 for the years ended December 31, 2021 and 2020, respectively, as a result of the options and restricted stock disclosed below, with $292,000 and $145,000 allocated to the Company for the years ended December 31, 2021 and 2020, respectively, recorded within engineering, selling and administrative expenses. The allocation was based on the basis of direct usage for direct employees of the Company, with the remainder allocated on a pro rata basis of consolidated sales, which is considered to be a reasonable reflection of the historical utilization levels of these services. The amounts presented are not necessarily indicative of future awards and do not necessarily reflect the results that the Company would have experienced as a standalone company for the period presented.

The following table summarizes information about allocated LGL Group stock options outstanding and exercisable at December 31, 2021:

		Number of Shares Outstanding				Weighted Average Exercise Price				Weighted Average Grant Date Fair Value				Weighted Average Remaining Term (in years)				Aggregate Intrinsic Value (in thousands)
Option Balances at December 31, 2020			33,000			$	10.58			$	3.27				3.1			$	69
Options Granted			-				-				-				-				-
Options Exercised			(8,000	)			3.90				0.89				-				-
Options Forfeited			-				-				-				-				-
Option Balances at December 31, 2021			25,000			$	12.72			$	4.02				2.9			$	—
Options Exercisable at December 31, 2021			15,000			$	12.72			$	4.02				2.9			$	—

F-16

 

---

 

 

 

A summary of LGL Group’s restricted stock awards for the year ended December 31, 2021 follows:

		Number of Shares				Weighted Average Grant Date Fair Value				Aggregate Grant Date Fair value (in thousands)
Balance at December 31, 2020			55,762			$	9.42			$	525
Granted			45,000				11.84				533
Vested			(18,229	)			11.72				(214	)
Forfeited			(26,250	)			9.01				(236	)
Balance at December 31, 2021			56,283			$	10.80			$	608

 

The following disclosures of share-based compensation expense recognized by the Company are based on the expense from grants related directly to Company employees.

Stock Options

Stock options are granted with an exercise price equal to the fair market value of LGL Group common stock on the date of grant. Stock options have a maximum term of 10 years and generally vest ratably over three to five years. The fair value of stock options granted is determined using the Black-Scholes option-pricing model. The determination of the fair value of options is affected by the LGL stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the LGL Group expected stock price volatility over the term of the awards. There were no stock options issued to Company employees during 2021 or 2020.

As of December 31, 2021, there was $28,000 of total unrecognized compensation cost, related to unvested stock options. That cost is expected to be recognized over a weighted average period of 0.9 years.

As of December 31, 2021, there were 25,000 outstanding stock options, 15,000 of which were fully vested, with no intrinsic value.

Restricted Stock

Restricted stock vests over the terms as indicated within each restricted stock agreement. The fair value of restricted stock awards is based on the market value of an unrestricted share of LGL Group common stock on the date of grant.  There was one grant of 45,000 shares of restricted stock during 2021 for an LGL Group employee with a grant date fair value of $11.84 per share, with 15,000 shares vested immediately and 30,000 which will vest over 1.25 years.

As of December 31, 2021, there was $435,000 of total unrecognized compensation cost, related to unvested restricted stock. That cost is expected to be recognized over a weighted average period of 1 year.

I. Employee Benefit Plan

LGL Group offers a defined contribution plan for eligible employees in which the Company makes discretionary contributions up to 50% of the first 6% of eligible compensation contributed by participants. The Company contributed approximately $112,000 and $117,000 in discretionary contributions during 2021 and 2020, which was allocated to the Company and related directly to its employees. Participants vest in employer contributions starting after their second year of service at 20% increments, vesting 100% in year six.

J. Contingencies

In the normal course of business, the Company and its subsidiaries may become defendants in certain product liability, patent infringement, worker claims and other litigation. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. The Company is not involved in any legal proceedings other than routine litigation arising in the normal course of business, none of which the Company believes will have a material adverse effect on the Company's business, financial condition or results of operations.

 

F-17

 

---

 

 

K. Domestic and Foreign Revenues

Significant foreign revenues from operations (10% or more of foreign sales) were as follows:

		Year Ended December 31,
		2021				2020
		(in thousands)
Malaysia		$	2,745			$	2,842
Hong Kong			682				1,211
Australia			189				974
All other foreign countries			2,126				2,255
Total foreign revenues		$	5,742			$	7,282
Total domestic revenues		$	20,952			$	22,702

The Company allocates its foreign revenue based on the customer's ship-to location.

L. Payroll Protection Program

On April 15, 2020, the Company and its PTI subsidiary entered into loans with City National Bank of Florida, a national banking association, as the lender, in an aggregate principal amount of $1,848,000 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act. On May 14, 2020, the Company returned all amounts pursuant to such loans and such loans were thereby terminated.

M. Subsequent Events

The Company evaluated subsequent events for matters that may require disclosure in these combined financial statements through April 11, 2022. Other than as already disclosed, there have been no events that have occurred that would require disclosure in the combined financial statements.

 

F-18

 

---

 

 

MTRON BUSINESS OF THE LGL GROUP, INC.

CONDENSED COMBINED BALANCE SHEETS

(Dollars in Thousands)

 

		June 30, 2022				December 31, 2021				June 30, 2021
		(unaudited)								(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	1,103			$	2,635			$	1,990
Accounts receivable, net of allowances of $131, $119 and $124, respectively			4,329				3,995				3,954
Inventories, net			6,128				5,221				5,375
Prepaid expenses and other current assets			213				242				179
Total Current Assets			11,773				12,093				11,498
Property, Plant and Equipment
Land			536				536				536
Buildings and improvements			4,877				4,869				4,822
Machinery and equipment			18,563				18,176				17,523
Gross property, plant and equipment			23,976				23,581				22,881
Less:  accumulated depreciation			(20,512	)			(20,199	)			(19,934	)
Net property, plant and equipment			3,464				3,382				2,947
Right-of-use lease asset			183				218				180
Due from related party			4,112				1,969				1,242
Intangible assets, net			125				152				179
Deferred income tax asset			1,973				2,187				2,514
Other assets			20				5				10
Total Assets		$	21,650			$	20,006			$	18,570
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable		$	1,584			$	1,396			$	1,044
Accrued compensation and commissions expense			1,195				1,213				983
Other accrued expenses			384				403				443
Income Tax Payable			72				—				—
Total Current Liabilities			3,235				3,012				2,470
Long-term lease liability			112				145				119
Total Liabilities			3,347				3,157				2,589
Contingencies (Note G)
Equity
Net investment by LGL Group, Inc.			18,303				16,849				15,981
Total Equity			18,303				16,849				15,981
Total Liabilities and Equity		$	21,650			$	20,006			$	18,570

 

See Accompanying Notes to Condensed Combined Financial Statements (Unaudited).

F-19

 

---

 

MTRON BUSINESS OF THE LGL GROUP, INC.

CONDENSED COMBINED STATEMENTS OF OPERATIONS

(Dollars in Thousands)

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2022				2021				2022				2021
REVENUES		$	7,064			$	6,407			$	14,755			$	12,661
Costs and expenses:
Manufacturing cost of sales			4,412				3,945				9,231				8,202
Engineering, selling and administrative			2,049				1,669				4,107				3,364
OPERATING INCOME			603				793				1,417				1,095
Other (Expense) Income:
Interest expense, net			(2	)			(3	)			(5	)			(6	)
Other (expense) income, net			(9	)			(7	)			(26	)			39
Total other (expense) income, net			(11	)			(10	)			(31	)			33
INCOME BEFORE INCOME TAXES			592				783				1,386				1,128
Income tax provision			106				146				281				210
NET INCOME		$	486			$	637			$	1,105			$	918

 

See Accompanying Notes to Condensed Combined Financial Statements (Unaudited).

F-20

 

---

 

MTRON BUSINESS OF THE LGL GROUP, INC.

CONDENSED COMBINED STATEMENTS OF EQUITY

(Dollars in Thousands)

(Unaudited)

 

		Net Investment by LGL Group
Balance at December 31, 2021		$	16,849
Net income			619
Net transfers to LGL Group, Inc.			240
Balance at March 31, 2022		$	17,708
Net income			486
Net transfers to LGL Group, Inc.			109
Balance at June 30, 2022		$	18,303
Balance at December 31, 2020		$	14,974
Net income			281
Net transfers to LGL Group, Inc.			47
Balance at March 31, 2021		$	15,302
Net income			637
Net transfers to LGL Group, Inc.			42
Balance at June 30, 2021		$	15,981

 

See Accompanying Notes to Condensed Combined Financial Statements (Unaudited).

F-21

 

---

 

MTRON BUSINESS OF THE LGL GROUP, INC.

CONDENSED COMBINED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2022				2021
OPERATING ACTIVITIES
Net income		$	1,105			$	918
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			313				224
Amortization of finite-lived intangible assets			27				27
Stock-based compensation expense			287				89
Deferred income tax expense			214				180
Changes in operating assets and liabilities:
Increase in accounts receivable, net			(334	)			(6	)
Increase in inventories, net			(907	)			(270	)
Decrease in prepaid expenses and other assets			34				60
Increase (decrease) in accounts payable, accrued compensation    and commissions expense and other			225				(332	)
Net cash provided by operating activities			964				890
INVESTING ACTIVITIES
Capital expenditures			(395	)			(400	)
Net cash used in investing activities			(395	)			(400	)
FINANCING ACTIVITIES
Net transfers from LGL Group, Inc.			62				—
Prepaid financing costs			(20	)			—
Payments to related party			(2,143	)			(956	)
Net cash used in financing activities			(2,101	)			(956	)
Decrease in cash and cash equivalents			(1,532	)			(466	)
Cash and cash equivalents at beginning of year			2,635				2,456
Cash and cash equivalents at end of year		$	1,103			$	1,990

 

See Accompanying Notes to Condensed Combined Financial Statements (Unaudited).

F-22

 

---

 

MTRON BUSINESS OF THE LGL GROUP, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(Unaudited)

 

A. Background and Description of Business

The Separation

The LGL Group, Inc. (“LGL” or the “Parent”) operates the Mtron and Precision Time and Frequency businesses in the defense, aerospace, and space business markets. On August 3, 2022, LGL announced that its Board of Directors approved a plan to separate LGL into two independent, public companies: LGL and Mtron. LGL expects to effect this through a tax-free spin-off of Mtron to LGL’s shareholders through a pro-rata distribution to LGL’s shareholders of common stock of Mtron Industries, Inc., holding certain assets and liabilities comprising the Mtron business. MTron Industries, Inc. (the “Company”, “we”, “our” or “us”) will become a separate, independent, publicly traded company. The spin-off is expected to be completed in October 2022, subject to certain customary market, regulatory and other conditions.

Description of Business

The Company was founded in 1965 and is engaged in the design, manufacturing and marketing of highly-engineered, high reliability frequency and spectrum control products used to control the frequency or timing of signals in electronic circuits.

The Company’s operations include its two principal subsidiaries, (1) Piezo Technology, Inc. ("PTI") and (2) M-tron Asia, LLC ("Mtron"). The Company has operations in Orlando, Florida; Yankton, South Dakota; and Noida, India, and has sales offices in Austin, Texas and Hong Kong. The Company and its subsidiaries currently operate together as a single group under the MtronPTI brand (“MtronPTI”).

The Company offers a wide range of precision frequency control and spectrum control solutions including: RF, microwave and millimeter wave filters; cavity, crystal, ceramic, lumped element and switched filters; high performance and high frequency OCXOs, integrated PLL OCXOs, TCXOs, VCXOs, low jitter and harsh environment oscillators; crystal resonators, Integrated Microwave Assemblies (IMA); and state-of-the-art solid state power amplifier products.

B. Summary of Significant Accounting Policies

Basis of Presentation

The condensed combined financial statements include the accounts of the Company and all of its majority-owned subsidiaries. Intercompany transactions and accounts have been eliminated. The condensed combined financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

The condensed combined financial statements have been derived from the consolidated financial statements and accounting records of The LGL Group, Inc. (“LGL Group”) and have been prepared under GAAP. These condensed combined financial statements may not be indicative of the Company’s future performance and do not necessarily reflect what the financial position, results of operations, and cash flows would have been had it operated as an independent company during the periods presented.

Transactions between the Company and LGL Group have been included in these condensed combined financial statements. For those transactions between the Company and LGL Group that have been historically settled in cash, the Company has reflected such balances in the Condensed Combined Balance Sheets as Due from Related Parties or Due to Related Parties. The aggregate net effect of transactions between the Company and related parties that have been historically settled other than in cash are reflected in the Condensed Combined Balance Sheets as Net Investment by LGL Group, Inc. and in the Condensed Combined Statements of Cash Flows as Net Transfers to LGL Group, Inc. For additional information, see Note C – Related Party Transactions.

The Condensed Combined Balance Sheets include certain LGL Group assets and liabilities that are specifically identifiable or otherwise attributable to the Company. The debt and associated interest expense in these condensed combined financial statements relate to third-party borrowings under a revolving credit agreement specifically attributable to legal obligations of the Company.

The Cash and Cash Equivalents held by LGL Group at the corporate level are not specifically identifiable to the Company and, therefore, have not been reflected in the Company’s Condensed Combined Balance Sheets. Cash and Cash Equivalents in the Condensed Combined Balance Sheets represent Cash and Cash Equivalents held by the Company at the respective period-ends.

F-23

 

---

 

The Condensed Combined Statements of Operations include an allocation for certain corporate and shared service functions historically provided by our Parent, including, but not limited to, executive oversight, accounting, tax, and other shared services. These expenses have been allocated to us on the basis of direct usage when identifiable, with the remainder allocated on a pro rata basis of consolidated sales or other measures considered to be a reasonable reflection of the historical utilization levels of these services. Management believes the assumptions underlying our condensed combined financial statements, including the assumptions regarding the allocation of general corporate expenses from our Parent, are reasonable. Nevertheless, our condensed combined financial statements may not include all of the actual expenses that would have been incurred had we operated as a standalone company during the periods presented and may not reflect our combined results of operations, financial position and cash flows had we operated as a standalone company during the periods presented. Actual costs that would have been incurred if we had operated as a standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure.

Going forward, the Company may perform these functions using its own resources or outsourced services. For a period following the planned separation, some of these functions may continue to be provided by LGL Group under a transition services agreement, and the Company may provide some services to LGL Group under the transition services agreement. The Company may also enter into certain commercial arrangements with LGL Group in connection with the planned separation. We also may incur additional costs associated with being a standalone, publicly listed company that were not included in the expense allocations and, therefore, would result in additional costs that are not reflected in our historical results of operations, financial position and cash flows.

During the period presented in these Condensed Combined Financial Statements, the Company’s income tax expense and deferred tax balances have been included in the LGL Group’ income tax returns. Income tax expense and deferred tax balances contained in the Condensed Combined Financial Statements are presented on a separate return basis, as if the Company had filed its own income tax returns. As a result, actual tax transactions included in the consolidated financial statements of LGL Group may or may not be included in the Condensed Combined Financial Statement of the Company. Similarly, the tax treatment of certain items reflected in the Condensed Combined Financial Statement of the Company may or may not be reflected in the consolidated financial statements and income tax returns of LGL Group. The taxes recorded in the Condensed Combined Statements of Operations are not necessarily representative of the taxes that may arise in the future if the Company files its income tax returns independent from LGL Group’ returns.

Interim Financial Statements

The Condensed Combined Financial Statements as of and for the three and six months ended June 30, 2022 and 2021 are unaudited. These Condensed Combined Financial Statements should be read in conjunction with the audited Combined Financial Statements and Notes thereto for the fiscal years ended December 31, 2021 and 2020.

In the opinion of management, the accompanying Condensed Combined Financial Statements reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods.

Uses of Estimates

The preparation of the condensed combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue from the sale of its products in accordance with the criteria in Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which are:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The Company meets these conditions upon the Company’s satisfaction of the performance obligation, usually at the time of shipment to the customer, because control passes to the customer at that time. Our standard terms for customers are net due within 30 days, with a few exceptions, none regularly exceeding 60 days.

The Company’s two product groupings, Frequency Control and Spectrum Control, have identical characteristics for revenue recognition. Both are recognized upon shipment to the customer.

The Company provides disaggregated revenue details by geographic markets in Note H – Domestic and Foreign Revenues.

F-24

 

---

 

The Company offers a limited right of return and/or authorized price protection provisions in its agreements with certain electronic component distributors who resell the Company's products to original equipment manufacturers or electronic manufacturing services companies. As a result, the Company estimates and records a reserve for future returns and other charges against revenue at the time of shipment consistent with the terms of sale. The reserve is estimated based on historical experience with each respective distributor. These reserves and charges are immaterial as the Company does not have a history of significant price protection adjustments or returns. The Company provides a standard assurance warranty that does not create a performance obligation.

Practical Expedients:

-

The Company applies the practical expedient for shipping and handling as fulfillment costs.

-

The Company expenses sales commissions as sales and marketing expenses in the period they are incurred.

Impairments of Long-Lived Assets

Long-lived assets, including intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Long-lived assets are grouped with other assets to the lowest level to which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Management assesses the recoverability of the carrying cost of the assets based on a review of projected undiscounted cash flows. If an asset is held for sale, management reviews its estimated fair value less cost to sell. Fair value is determined using pertinent market information, including appraisals or broker's estimates, and/or projected discounted cash flows. In the event an impairment loss is identified, it is recognized based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset.

We performed an assessment to determine if there were any indicators of impairment as a result of the operating conditions resulting from the coronavirus (“COVID-19”) pandemic at the end of the fiscal quarter ended June 30, 2022. We concluded that, while there were events and circumstances in the macro-environment that did impact us, we did not experience any entity-specific indicators of asset impairment and no triggering events occurred.

Net Investment by LGL Group, Inc.

Net investment by LGL Group, Inc. in the Condensed Combined Balance Sheets is presented in lieu of stockholders’ equity and represents LGL’s historical investment in the Company, the accumulated net earnings after taxes and the net effect of the transactions with and allocations from LGL. All transactions reflected in Net Investment by LGL Group, Inc. in the accompanying Condensed Combined Balance Sheets have been considered as financing activities for purposes of the Condensed Combined Statements of Cash Flows.

For additional information, see Basis of Presentation above and Note C – Related Party Transactions.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13),” which changes the impairment model for most financial assets. The standard replaces the incurred loss model with the current expected credit loss (“CECL”) model to estimate credit losses for financial assets. The provisions of the standard are effective for the Company on January 1, 2023; early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its condensed combined financial statements.

C. Related Party Transactions

The condensed combined financial statements have been prepared on a standalone basis and are derived from the consolidated financial statements and accounting records of The LGL Group, Inc. The following discussion summarizes activity between the Company and LGL.

Allocation of General Corporate Expenses

For purposes of preparing these condensed combined financial statements on a “carve-out” basis, we have allocated a portion of LGL Group’s corporate expenses, totaling $260,000 and $651,000 to the Company for the three and six months ended June 30, 2022, respectively, and $189,000 and $385,000 to the Company for the three and six months ended June 30, 2021, respectively, which are recorded within engineering, selling and administrative expenses. See Note B – Summary of Significant Accounting Policies for a discussion of the methodology used to allocate corporate-related costs for purposes of preparing these financial statements on a “carve-out” basis.

F-25

 

---

 

Due to and from Related Parties

Balances between the Company and LGL Group, Inc. that are derived from transactions that have been historically cash settled are reflected in the Condensed Combined Balance Sheets as Due to Related Parties. Balances between the Company and LGL Group, Inc. or its affiliates derived from transactions that have been historically settled other than in cash are included in Net Investment by LGL Group, Inc. within Equity on the Condensed Combined Balance Sheets.

Net Transfers to LGL Group, Inc.

The following table presents the components of Net Transfers to LGL Group, Inc. in the Condensed Combined Statements of Equity (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2022				2021				2022				2021
Corporate Expense Allocations		$	41			$	25			$	62			$	-
Share-based Compensation Expense			68				17				287				89
Total Net Transfers to LGL Group, Inc.		$	109			$	42			$	349			$	89

D. Inventories, net

Inventories are valued at the lower of cost or net realizable value using the FIFO (first-in, first-out) method. The Company reduces the value of its inventories to net realizable value when the net realizable value is believed to be less than the cost of the item. The inventory reserve for excess and obsolescence inventory as of June 30, 2022 and December 31, 2021 and June 30, 2021 was $1,510,000, $1,381,000 and $1,302,000, respectively.

Inventories are comprised of the following (in thousands):

		June 30, 2022				December 31, 2021				June 30, 2021
		(unaudited)								(unaudited)
Raw materials		$	2,603			$	2,061			$	1,757
Work in process			2,654				2,190				2,772
Finished goods			871				970				846
Total Inventories, net		$	6,128			$	5,221			$	5,375

E. Income Taxes

The Company’s quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items within the period presented. To determine the annual effective tax rate, the Company estimates both the total income (loss) before income taxes for the full year and the jurisdictions in which that income (loss) is subject to tax. The actual effective tax rate for the full year may differ from these estimates if income (loss) before income taxes is greater than or less than what was estimated or if the allocation of income (loss) to jurisdictions in which it is taxed is different from the estimated allocations.

The effective tax rate for the six months ended June 30, 2022 and June 30, 2021 was 20.3% and 18.6%, respectively. The effective tax rate for the three months ended June 30, 2022 and June 30, 2021 was 17.9% and 18.6%, respectively. Differences between the Company’s effective income tax rate and the U.S. federal statutory rate are primarily the impact of research and development credits, the mix of earnings between jurisdictions, and state taxes.

F. Revolving Credit Agreement

On May 12, 2022, the loan agreement for a revolving line of credit with Synovus Bank expired. At June 30, 2022 and December 31, 2021, there were no outstanding borrowings under the revolving line of credit with Synovus Bank.

On June 15, 2022, Mtron entered into a loan agreement (the “Loan Agreement”) for a revolving line of credit with Fifth Third Bank, National Association, for up to $5.0 million bearing interest at the Secured Overnight Financing Rate (“SOFR”) rate plus a margin of 2.25%. The Loan Agreement has a maturity date of June 15, 2025 and contains various affirmative and negative covenants that are customary for lines of credit and transactions of this type, including limitations on the incurrence of debt and liabilities, as well as financial reporting requirements. The Loan Agreement also imposes certain financial covenants based on Debt Service Coverage Ratio, Current Ratio, and the Ratio of Total Liabilities to Total Net Worth (as such terms are defined in the Loan Agreement). All loans pursuant to the Loan Agreement will be secured by a continuing and unconditional first priority security interest in and to any and all

F-26

 

---

 

property of the Company. At June 30, 2022, there were no outstanding borrowings under the revolving line of credit with Fifth Third Bank

G. Contingencies

In the normal course of business, the Company and its subsidiaries may become defendants in certain product liability, patent infringement, worker claims and other litigation. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. The Company is not involved in any legal proceedings other than routine litigation arising in the normal course of business, none of which the Company believes will have a material adverse effect on the Company's business, financial condition or results of operations.

 

 

H. Domestic and Foreign Revenues

Significant foreign revenues from operations (10% or more of foreign sales) were as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2022				2021				2022				2021
Malaysia		$	1,231			$	433			$	2,524			$	1,042
Hong Kong			139				166				376				355
Germany			90				204				242				277
All other foreign countries			369				578				817				952
Total foreign revenues		$	1,829			$	1,381			$	3,959			$	2,626
Total domestic revenues		$	5,235			$	5,026			$	10,796			$	10,035

The Company allocates its foreign revenue based on the customer's ship-to location.

I. Subsequent Events

The Company evaluated subsequent events for matters that may require disclosure in these condensed combined financial statements through August 19, 2022. Other than as already disclosed, there have been no events that have occurred that would require disclosure in the condensed combined financial statements.

F-27